In February, expanding on
the ongoing press coverage of possible LIBOR and EURIBOR
manipulations, I have written about the functioning of these base
rates.
As the UK Financial
Services Authority (FSA) and the US Commodity Futures Trading
Commission (CFTC) have inflicted, on June 27, 2012, a 59.5 M Sterling
/ 200 M USD fine on Barclays for its shortcomings relating to LIBOR /
EURIBOR submissions, I would like to come back to this topic.
Chairman Marcus Agius
having resigned today, the consequences for Barclays are still
ongoing.
“Last week’s
events – evidencing as they do unacceptable standards of behavior
within the bank – have dealt a devastating blow to Barclays’
reputation. As chairman, I am the ultimate guardian of the bank’s
reputation. Accordingly, the buck stops with me and I must
acknowledge responsibility by standing aside.”
In this post, I would
like to discuss the FSA fine and its rationale.
Introduction
The central stipulations
for the FSA fine are the following:
I have discussed the
specific obligations that a LIBOR / EURIBOR contributor panel bank
must respect, in the previous posts in February 2012.
Barclays LIBOR /
EURIBOR Violations
In its final notice, the
FSA accuses Barclays of having violated the above stipulations by
executing 4 activities:
1. Violation
of FSA principle 5 through inappropriate submissions following
requests by Barclays’ and third party banks’ derivatives traders
In
my view, this part of FSA’s final notice is the most interesting
and best justified part of its decision.
As the FSA clarifies, “the definitions of LIBOR and EURIBOR do
not allow for consideration of derivatives traders’ positions.”
In case of LIBOR, the definition specifically provides for this fact.
In case of EURIBOR, this applies naturally because a submission
influenced by derivatives’ traders would obviously reveal a
conflict of interest. As a matter of fact, Barclays’
derivatives traders trade OTC interest rate swaps and exchange traded
interest rate futures whose payment obligations are oftentimes based
on LIBOR or EURIBOR.
The FSA cites many
examples of email / chat exchanges between Barclays’ derivatives
traders and LIBOR / EURIBOR submitters:
Trader C: “The big
day [has] arrived… My NYK are screaming at me about an unchanged 3m
libor. As always, any help wd be greatly appreciated. What do you
think you’ll go for 3m?”
Submitter: “I am
going 90 altho 91 is what I should be posting”.
Trader C: “[…]
when I retire and write a book about this business your name will be
written in golden letters […]”.
Submitter: “I would
prefer this [to] not be in any book!”
Trader F: “Pls set
3m libor as high as possible today.
Submitter: “Sure
5.37 okay?”
Trader F: “5.36 is
fine”
In addition, to these
striking individual cases, FSA’s investigations have shown that at
least 70 % of derivatives traders’ LIBOR requests and at least 86 %
of derivatives traders’ EURIBOR requests were followed by
submissions consistent with such requests.
The FSA goes on
concluding that the above described misconduct at Barclays was common
and nearly daily practice over a number of years.
2. Violation of FSA
principle 5 through inappropriate submissions to avoid negative media
comment
When the financial crisis
was, between end of 2007 and mid 2009, at its peak level, banks’
liquidity was a particularly important issue. At that time Barclays
posted significantly higher LIBOR / EURIBOR rates than its peers. As
this fact caused negative publicity for Barclays, the bank felt
pressure to submit lower rates. The FSA puts it very nicely:
“Senior Management
at high levels withing Barclays expressed concerns over this negative
publicity. Senior Management’s concerns in turn resulted in
instructions being given by less senior managers at Barclays to
reduce LIBOR submissions in order to avoid negative media comment.”
However, reading through
this passage of the final notice, I must admit that FSA’s reasoning
is much less convincing here.
As a matter of fact, the
FSA outlines that Barclays had raised general concerns with the
regulators about the accuracy of LIBOR submissions.
In addition, it mentions
that interbank-lending was pretty much limited during that time. As a
consequence, a correct price finding was certainly very tough, if not
impossible. In my view, there is a natural tendency in such an
illiquid market to set prices according to those set by peers, and
Barclays can only hardly be blamed for this.
Reading through this
passage of FSA’s decision, I miss a clear demonstration of what
Barclays’ specific wrongdoings consisted of. It seems more that the
bank followed the other contributing banks than leading the process
itself.
3. Violation of FSA
principle 3 through systems and control failings
Until December 2009,
Barclays had no specific systems and controls in place relating to
its LIBOR and EURIBOR submissions processes. The FSA blames Barclays
for this lack all the more as the bank had repeatedly received
proposed methodologies and draft procedures for LIBOR submitters by
BBA’s FX & MM Committee as well as a reminder by EURIBOR
regulator EBF to ensure and maintain a systematic and close control
of the bank’s daily quotations.
4. Violation of FSA
principle 2 through compliance failings
The
FSA describes in its decision that LIBOR issues have been escalated
to the bank’s compliance functions on 3 occasions and that
compliance did not react appropriately. More specifically,
“in September 2007,
senior management flagged the potential conflict of interest between
Barclays’ submitters and derivatives traders. This and other
concerns were escalated to Compliance. Compliance did not discuss
these issues with the Submitters and did not draft any policies or
procedures relating to this conflict of interest.”
Resource:
- Financial Services Authority – Final Note Ref. 122702 dated June 27, 2012
