Who’s Next in Libor Spotlight?

Investigation of interest-rate manipulation has touched up to 18 financial institutions.

Barclays Plc’s settlement of about $451 million with U.S. and U.K. regulators last week offered the first glimpse of what banks may have to pay to resolve a global probe of interest-rate manipulation. The question now is who’s next.

The two-year investigation, which involves regulators on three continents, has touched as many as 18 financial institutions that help set London and Tokyo interbank offered rates for dollars, euros and yen. That number includes as many as 12 firms that have fired or suspended traders in connection with related internal probes of whether their employees tried to manipulate the rates known as Libor and Tibor.

The span of the investigation has prompted at least one regulator to ask for more time, according to a person with knowledge of the matter. The U.S. Commodity Futures Trading Commission recently sent out so-called tolling agreements in which the banks would waive their right to claim a lawsuit should be thrown out if a five-year statute of limitations has elapsed, said the person, who asked not to be identified because the agreements aren’t public. CFTC spokesman Steven Adamske declined to comment.

The stakes in the probe are high. Barclays Chief Executive Officer Robert Diamond stepped down today one day after Chairman Marcus Agius resigned in a bid to shield Diamond from pressure from British lawmakers. U.K. Prime Minister David Cameron yesterday announced a parliamentary inquiry into the U.K. banking industry and Libor.

Regulators including the U.K. Financial Services Authority and U.S. Department of Justice have signaled more claims are on the way.

Barclays “was not an isolated case,” Tracey McDermott, the FSA’s acting head of enforcement, said yesterday in a speech. She said the regulator is conducting “a number of investigations concerning Libor.”

The Justice Department, as part of its settlement with Barclays last week, said the firm is assisting the investigation into other firms and individuals, and was the first to provide “extensive and meaningful cooperation.”


False Rates

The investigations focus on whether banks reported false rates in an attempt to hide their true cost of borrowing during the financial market turmoil of 2008, and whether traders colluded to rig the benchmark to profit from interest rate derivatives.

Traders at Barclays, the U.K.’s second-biggest bank by assets, routinely coordinated with counterparts from at least four other banks in an attempt to move interest rate benchmarks, according to regulators. The bank also reported artificially low borrowing costs in October 2008 after a senior manager discussed outside perceptions about the bank’s strength with regulators at the Bank of England.

The investigation began to unfold publicly after UBS AG disclosed in July 2011 that it had gotten conditional immunity for cooperating with the U.S. Justice Department’s antitrust investigation. In February, the Zurich-based bank said it had received similar immunity from the Swiss Competition Commission, and people with knowledge of the matter said it also sought protection from prosecution by Canadian regulators in January 2010.

Based on UBS’s disclosures, regulators in Canada have alleged that banks communicated with each other and through brokers to manipulate the yen Libor rate.

Libor is derived from a survey of banks conducted daily for the British Bankers’ Association in London. Lenders are asked how much it would cost them to borrow from one another for 15 different periods, from overnight to one year, in currencies including dollars, euros, yen and Swiss francs. A predetermined number of quotes are excluded and those left are averaged and published for each currency by the BBA before noon.


Canadian Regulators

According to documents filed in the Ontario Superior Court in May 2011, lawyers for UBS gave information to Canadian regulators, including details of the lender’s own internal probe. Based on UBS’s information, the regulator said HSBC Holdings Plc, Royal Bank of Scotland Group Plc, Deutsche Bank AG, JPMorgan Chase & Co., Citigroup Inc., as well as brokers at ICAP Plc and RP Martin Holdings Ltd. colluded to manipulate the yen Libor rate.

The European Union, which raided UBS in October as part of its own investigation, hasn’t said if it will grant immunity.

So far, only Japanese regulators have punished the lender over the interest-rate probe. In December, Japan’s Financial Services Agency ordered UBS Securities Japan division to suspend trading in derivatives transactions related to yen Libor and Euroyen Tibor from Jan. 10 to 16. The regulator found that the securities unit had “serious problems” in its internal controls and ordered it to develop a new compliance program.

In a related case, Citigroup’s Tokyo-based securities unit was banned from trading tied to Libor and Tibor for two weeks in January after the Japanese regulator found that employees at Citigroup and UBS tried to improperly influence Tibor to their firms’ advantage.

The bank, which said last week that it wasn’t part of the FSA’s probe, didn’t say whether it was still ensnared in other regulators’ investigations.

Credit Suisse has disclosed that it’s also cooperating fully with the investigations, including a probe by the Swiss Competition Commission into whether traders and rate-setters at 12 banks and other financial intermediaries colluded to affect the bid-ask spread for derivatives tied to Libor and Tibor. Credit Suisse is not a panel bank for yen Libor, yen Tibor or Euroyen Tibor, the bank said.


Traders Disciplined

Several firms have disciplined traders involved in the conduct.

RBS terminated or suspended at least four employees in connection with the probe and is facing a wrongful dismissal lawsuit from one of the employees, who accused the bank of using him as a scapegoat after condoning traders’ conduct. Tan Chi Min, who filed the lawsuit with the Singapore High Court in March, said RBS interest-rate traders were seated with one of the main rate setters in its London office to share information and discussed rates on conference calls.

Two Lloyds Banking Group Plc traders who had been suspended earlier this year because of the investigation returned to work last week, two people briefed on the matter said.

Along with the regulatory scrutiny, many of the banks face private lawsuits related to the alleged conduct. A lawsuit in U.S. District Court in Manhattan is seeking damages from Bank of America, Barclays, Citibank, Credit Suisse, Deutsche Bank, HSBC, JPMorgan, Lloyds, RBS, The Norinchukin Bank, UBS, WestLB AG, Rabobank Group, HBOS Plc, Bank of Tokyo-Mitsubishi UFJ Ltd, RBC, and Societe Generale.


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