Analysis: Libor rigging is just tip of iceberg

Published Jun 18, 2013

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Matthew Leising New York

The probe into manipulation of the London interbank offered rate (Libor) is proving to be the tip of the iceberg as inquiries show that if there is a chance to rig benchmark rates in world markets, someone is usually willing to try.

Singapore’s monetary authority last week censured 20 banks for attempting to fix interest rate levels and ordered them to set aside as much as $9.6 billion (R95bn).

Britain’s markets regulator is looking into the $4.7 trillion-a-day currency market after Bloomberg reported last week that traders had manipulated foreign exchange rates for more than a decade.

“It’s happened time and again: all these markets have been influenced by major market makers, which is a polite way of saying they’ve been rigged,” said Charles Geisst, a finance professor at Manhattan College in Riverdale, New York.

Barclays, UBS and Royal Bank of Scotland Group have been fined about $2.5bn in the past year for distorting Libor, which is tied to $300 trillion worth of securities.

Regulators are also probing ISDAfix, a measure used in the $370 trillion market for interest rate swops, as well as how some oil products prices are set.

Inquiries are broadening into the transparency of benchmarks whose levels can be determined by the same people whose income they affect.

In the case of Libor, traders who stood to profit worked with bank employees responsible for submissions for the benchmark to rig the price, according to the UK Financial Services Authority.

The International Organisation of Securities Commissions (IOSCO), a Madrid-based group that harmonises market rules, identified a set of benchmarks in a January report that could impair the global economy if they were found to be prone to manipulation.

Along with Libor, ISDAfix and energy market prices, IOSCO flagged measures used in markets for overnight lending and repurchases, equities, bonds and alternative investments such as hedge funds.

IOSCO might next month propose final guidelines for improving transparency and oversight of benchmarks, including the WM/Reuters rates used in the foreign exchange market, the subject of last week’s Bloomberg story, according to people familiar with the matter but who did not want to be named.

Mark Williams, a finance professor at Boston University who wrote Uncontrolled Risk, a book on the rise and collapse of Lehman Brothers, said: “Banks and their regulators have to cap bank risk-taking behaviour before meaningful change can occur. This is a global problem and not isolated to a few big banks. It’s very troubling.”

Distortions are being found in areas that are beyond the scope of initiatives to rein in excesses.

Spot foreign exchange transactions, for example, fall outside the EU’s Markets in Financial Instruments Directive, or Mifid, which requires dealers take all reasonable steps to protect client interests. They are also exempt from the Dodd-Frank Act, which seeks to regulate derivatives in the US.

The UK Financial Conduct Authority is looking into possible manipulation in foreign exchange after being contacted by a money manager in March. The currency market, the biggest in the financial system, is one of the least regulated because transactions occur away from exchanges.

Distortions in foreign exchange markets have the potential to affect the buying power of consumers, while manipulation of interest rate benchmarks could raise the price of any goods bought on credit. – Bloomberg

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