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Posted  October 17, 2013

At the end of September, London interdealer broker ICAP agreed to pay £55 million in settlement of allegations of wrongdoing to UK and US regulators.  The investigations alleged that ICAP traders had participated in Libor rate fixing.  ICAP is the fourth financial institution to enter into a financial settlement with regulators in the UK and the US.  Previous global Libor settlement figures agreed by Barclays, UBS and RBS have totalled over $2.5 billion.

According to the UK Financial Conduct Authority (FCA) and the US Commodity Futures Trading Commission (CFTC), ICAP brokers “knowingly disseminated false and misleading information” about the true costs of Yen borrowing rates to Panel banks and market participants in an attempt to “manipulate the official fixing of the daily Yen Libor”.  The (attempted) manipulation took place between at least October 2006 and January 2011.  According to the CFTC, ICAP brokers on the Yen derivatives cash desk manipulated figures in order to aid and abet an important client employed by UBS in the latter’s attempt to improve his trading positions tied to the benchmark.

On the back of the financial settlement, three ICAP employees, one of them described by himself and others as “Lord Libor”, were also charged with criminal offences.

Libor is the average rate for which a leading bank can obtain unsecured funding for a given currency over a certain period.  It is reportedly used in approximately $10 trillion worth of loans and $350 trillion worth of other transactions and swaps each year.

The daily rates are calculated from individual submissions by a panel of the British Bankers’ Association banks.  Each day, the panel members submit rates of what it would cost them to borrow funds for certain periods of time and in different currencies.  Thompson Reuters, an independent agency, collates these submissions and calculates the rate by creating an average of the figures provided, after discarding the four highest and lowest submissions.  From early 2014, the administration of Libor will be taken over by NYSE Euronext, a London-based company regulated by the FCA.

Generally, the allegations in respect of Libor manipulation are that panel banks conspired to set rates by artificially lowering them.  They did this to lower their borrowing costs and give the impression that the banking system was more stable than it actually was.

According to the CFTC, ICAP was well placed to facilitate and participate in the benchmark manipulation, because of its role as an intermediary between banks and other financial institutions, which gave it an overview of individual banks’ borrowing costs.  ICAP provided a daily service to banks, distributing suggested daily rates which banks increasingly relied on during the financial crisis when submitting their own rates.

Rabobank, Citi, Deutsche Bank, and several other banks are expected to reach settlements with regulators within the next year, which may give a further indication of the scale of the manipulation.

At EU level, the Commission is conducting its own investigation into the alleged manipulation.  The results of the Commission investigation are still awaited.  Joaquin Almunia, the Vice President of the Commission, has frequently stated that the investigation is likely to conclude by the end of 2013.  It is widely expected that banks will agree a settlement with the Commission.  Under a settlement, banks review the evidence in the Commission’s file, and subsequently admit their involvement in the alleged cartel.  In return for their cooperation, banks receive a discount of 10 percent on the fines that would otherwise have been imposed.

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