Investigators Look Into Whether Bank Employees Manipulated Crucial Interest Rates

by Mike Mintz on February 16, 2012 · 0 comments

in Banking,martindale.com

Investigators in the United States, Europe and Japan are looking into whether certain traders tried to influence other bank employees to manipulate crucial interest rates.  The goal of the investigation is to determine if major banks conspired to manipulate benchmark interest rates such as the London interbank offered rate (LIBOR) and the Tokyo interbank offered rate (TIBOR).  The investigation started over a year ago, and it is unclear how many traders are under investigation.

So far, there has been no evidence that the traders’ actions caused bank employees to act inappropriately in setting the interest rates or that the banks schemed to set the rates.

LIBOR and TIBOR rates are calculated by using interest rate quotes submitted by a panel of banks. If the traders did influence the interest rate quotes, they would have been able to increase their profits on derivatives linked to the rates.

So far investigators in Japan have turned up e-mails and online chat messages from traders ostensibly trying to influence bank employees responsible for submitting the aforementioned interest rate quotes.

None of the traders has been charged with wrongdoing. However, Japanese authorities have initiated civil actions against two banks. Several banks have disclosed they are under investigation in Europe and the U.S., but so far no charges have been brought against them.

Investigators are looking into whether banks tried to manipulate LIBOR by presenting incorrect data during the financial crisis– for example, whether any banks artificially lowered their rates, so as not to look like they were in riskier financial condition than competing banks.

Japan’s investigators have turned up evidence that a UBS AG trader allegedly repeatedly requested that UBS employees and other banks’ employees change their rate quotes when presenting information used to calculate certain benchmark rates.

As a result of its investigations, approximately two months ago, Japanese regulators ordered UBS Securities Japan to suspend its trading of derivatives products related to LIBOR and TIBOR for several days as part of sanctions related to that trader’s alleged misconduct.

A Citibank managing director is also under scrutiny for having been persuaded to attempt to influence the TIBOR rate. Japan’s regulatory agency sanctioned Citibank in part by, similar to its actions against UBS AG, ordering Citibank to suspend its trading of derivatives products tied to LIBOR and TIBOR for several days.

Over in the U.S., the Department of Justice and other law enforcement agencies gave UBS partial immunity in return for its cooperation with their investigation.  Also, U.S. investigators, including from the Department of Justice, CFTC and SEC, have subpoenaed several banks in their continuing probe of the banks.  In fact, the CFTC advised several banks to retain outside counsel to review their LIBOR submissions process.

Not only are UBS and other firms under regulatory investigation, they are also defending lawsuits filed by investors alleging interest rate manipulation.

Some banks have even turned on their own employees, accusing them of trying to manipulate interest rates in order to improve their profit margins. For example, the Royal Bank of Scotland dismissed a trader several months ago for attempting to “improperly influence the rate setters” who made the bank’s yen LIBOR submissions.

It remains to be seen where this world-wide investigation will lead. One thing is clear, regulators around the globe are placing banks and other financial firms under increasing scrutiny in order to determine the factors that caused the recent financial meltdown.

 

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