ISDAfix Probe Unveils Obscure Rate

Measure plays role in instruments ranging from bonds to annuities.

ISDAfix rates at the center of a U.S. price-manipulation probe, while often relegated to the fine print of regulatory filings, help determine everything from borrowing costs on bonds that finance skyscrapers to interest on annuities.

Companies seeking to protect against soaring interest rates in the $379 trillion swaps market rely on them to mark the value of trades. Banks use the rates in setting coupons paid for $550 billion of bonds tied to commercial real estate. Fluctuations help determine the performance of structured notes bought by wealthy individuals and the amounts some states pay on pension annuities.

Profit Potential

ICAP, which is also being investigated in the Libor case by Britain’s Financial Services Authority and Canada’s Competition Bureau, manages the electronic screen known as 19901 on which prices are displayed throughout the day to about 6,000 corporate treasurers and money managers so they can value positions. At the market’s peak, ICAP’s rate-swaps desk paid its brokers as much as $7 million a year, earning the group the nickname “Treasure Island,” two people familiar with the matter said last week.

Obscure Benchmark

“I can’t really manipulate the market because everyone knows it should be around 1.5 percent because that’s where it’s actively trading,” he said. While Libor rates were pushed around by 3 to 5 basis points, manipulation of the ISDAfix rate may be limited to moves within a 1 basis-point range, he said.

‘Extra Cost’

“If you’re a dealer and you know the real price but the client has no idea, and is in fact misinformed, that gives you a lot of money-making opportunities,” he said.

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