Regulators probing the alleged manipulation of global interestrates are focusing on what traders involved in setting thebenchmark say were routine discussions condoned by theirsuperiors.

Staff responsible for submissions to the London interbankoffered rate regularly discussed where to set the measure withtraders sitting near them, interdealer brokers and counterparts atrival banks, according to money-market traders with directknowledge of procedures at three firms. The talks became commonpractice after money markets froze in 2007, making it difficult forindividual bankers to gauge the cost of borrowing from otherlenders, said the traders, who asked not to be identified becausethey weren't authorized to speak about the subject.

“A few hundred people, mostly based in one city and sitting inclose proximity to each other, set an index rate for trillions ofdollars of securities with little or no oversight,” said MarkSunshine, chief executive officer and chairman of Veritas FinancialPartners, a Florida-based firm that provides loans to businessesand real estate companies. “That cannot continue. The mechanismitself, the oversight and the penalties if violated, are woefullyinadequate.”