The Financial Services Authority (FSA) has today announced a fine of £87.5 million on RBS in relation to manipulation of the London Interbank Offered Rate (“LIBOR”).
This is a key interest rate which is set daily by a group of major London banks in relation to a variety of periods and currencies. While this notionally represents the interest rate applying when banks lend and borrow money between themselves (hence “Interbank”), we now know that at least some of the banks were making fraudulent submissions so as improve their trading positions.
LIBOR is used to determine the payments to be made under a wide variety of derivatives contracts, and the size of the trades is such that the bank can make a substantial profit by manipulating LIBOR by even one basis point (i.e. 0.01%). A profit for the bank necessarily implies a loss for whoever is on the other side of the deal.
The FSA have previously fined Barclays (£59.5 million) and UBS (£160 million) and we understand that their investigations are continuing into a number of other major banks. In addition to the FSA fine, RBS has also been fined $325 million by the US Commodity Futures Trading Commission and $150 million by the US Department of Justice. The CFTC press release contains some particularly interesting details, including extracts from conversations between traders such as:
Yen Trader 4: where’s young [Yen Trader 1] thinking of setting it?
Yen Trader 1: where would you like it[,] libor that is[,] same as yesterday is call
Yen Trader 4: haha, glad you clarified ! mixed feelings but mostly I’d like it all lower so the world starts to make a little more sense.
Senior Yen Trader: the whole HF [hedge fund] world will be kissing you instead of calling me if libor move lower
Yen Trader 1: ok, i will move the curve down[,] 1bp[,] maybe more[,] if I can
The US Attorney General has described RBS’s conduct as “a stunning abuse of trust”. The CFTC notes that the unlawful conduct went back to at least 2006 and continued even after RBS was aware of the Commission’s investigation. The FSA describe the abuse as “widespread” and notes that in response to a specific query in March 2011, RbS assured the FSA that it had proper systems in place to prevent LIBOR manipulation, when this was false. All in all, the outcome of this international investigation into RBS’s affairs is a damning indictment of its culture and management practices.
It is therefore unimpressive that RBS say in their press response: “There are no findings that anyone beyond individual traders and, in some instances, their immediate supervisors, was aware of, or instructed, any deliberate manipulation of submissions, nor is there any finding that RBS suppressed LIBOR submissions at the direction of senior management.” It is clear that senior management entirely failed to put in place appropriate oversight systems and indeed presided over a remuneration structure which rewarded wrong-doing by the bank’s employees.
We understand that RBS continues to be investigated by a number of other bodies, including the European Commission and the Japan Financial Services Agency. The FSA fine included a discount of 30% because RBS agreed to early settlement; without the discount the fine would have been £125 million.
This announcement will further undermine confidence in LIBOR and this will give rise to potential litigation in relation to the many trillions of pounds worth of LIBOR denominated contracts outstanding. It is doubtful, to say the least, that many small businesses would have taken out LIBOR based derivatives with RBS had they been aware that RBS was involved in manipulation of the key benchmark.