Libor Probe Said to Show Collusion

Global regulators have exposed flaws in banks' internal controls that may have allowed traders to manipulate interest rates around the world, two people with knowledge of the probe said.

Investigators also have received e-mail evidence of potential collusion between firms setting the London interbank offered rate, said the people, who declined to be identified because they weren't authorized to speak publicly. Regulators are focusing on a lack of so-called Chinese walls between traders and employees making interest-rate submissions on behalf of their banks, the people said. In some cases, the two groups may have sat close to each other, one person said.

Britain's Financial Services Authority is probing whether banks' proprietary-trading desks exploited information they had about the direction of Libor to trade interest-rate derivatives, potentially defrauding their firms' counterparties, the people said. The investigation may lead to civil fines for the banks and criminal charges for the traders involved, the people said. No penalties are likely from the FSA before year-end, and the case hasn't moved toward criminal charges, one person said.

“The entire story is very embarrassing for the banks,” said Tom Kirchmaier, a fellow in the financial-markets group at the London School of Economics. “I don't know how they will eradicate this. The regulators have to rethink the way they set Libor.”

The rate, a benchmark for about $360 trillion of financial products worldwide, is derived from a survey of banks conducted daily on behalf of the British Bankers' Association in London.

The lenders are asked how much it would cost them to borrow from one another for 15 different periods, from overnight to one year, in currencies including dollars, euros, yen and Swiss francs. After a predetermined number of quotes are excluded, those remaining are averaged and published for each currency by the BBA before noon.

Regulators worldwide are investigating whether banks attempted to manipulate the London, Tokyo and euro interbank offered rates, known as Libor, Tibor and Euribor. The U.S. Securities and Exchange Commission, U.S. Commodity Futures Trading Commission, U.S. Department of Justice, and Japan's Financial Supervisory Agency are all involved. The probes are being led separately, with individual regulators sharing some information among themselves, one of the people said.

JPMorgan Chase & Co., Deutsche Bank AG and HSBC Holdings Plc are among at least seven firms facing a Canadian probe into whether they participated in a conspiracy to manipulate prices on interest-rate derivatives. The nation's Competition Bureau is investigating the firms' conduct between 2007 and 2010, according to documents it filed with the Ontario Superior Court in May.

Barclays, UBS

HSBC, Barclays Plc and Royal Bank of Scotland Group Plc are among banks that have said they've received requests for information from global regulators in recent months. UBS AG said on Feb. 7 it had been given conditional immunity from the Swiss Competition Commission as part of an investigation into manipulation of the Yen Libor, Tibor, and Swiss franc Libor rates. The Zurich-based lender was last year granted similar immunity by the U.S. Department of Justice as part of its probes of Yen Libor and Euroyen Tibor rates.

Charles Schwab Corp., the largest independent brokerage by client assets, sued Bank of America Corp., Citigroup Inc. and other banks in August claiming they manipulated Libor from 2007 in violation of U.S. antitrust law.

Spokesmen for Schwab, HSBC, Barclays and Bank of America declined to comment. An official at RBS couldn't immediately comment. Danielle Romero-Apsilos, a spokeswoman for Citigroup, said in August the Schwab suit is “without merit.” She declined to comment further yesterday.

Antitrust authorities are focusing on whether banks might have helped a competitor manipulate one rate in exchange for help moving borrowing costs in a different currency, said another person with knowledge of the investigation. Regulators may view the conduct as a form of price-fixing because it could affect the price of the derivative products, the person said.

The FSA is investigating whether banks' Libor submissions reflected their actual cost of borrowing and is scrutinizing market data for potential anomalies, another person familiar with the investigation said. The watchdog is scanning e-mails between bankers for code words that could be used to manipulate Libor, said the person, who declined to be identified because they weren't authorized to speak publicly.

Officials at the FSA in London declined to comment.

Competition Watchdog

Switzerland's competition watchdog said Feb. 3 it had opened an investigation into 12 banks, saying derivative traders might have coordinated the submissions that determine Libor and Tibor. Traders might have colluded to manipulate the difference between the ask price and the bid price, or spread, of derivatives based on Libor and Tibor “to the detriment of their clients,” the regulator said.

European Union antitrust regulators are also investigating whether banks formed a cartel to manipulate borrowing rates, said two people with knowledge of the probe who declined to be identified because the inquiry isn't public. Barclays, HSBC and RBS have said the European Commission quizzed them last year.

RBS, the U.K.'s largest government-owned lender, has dismissed at least four employees in connection with the probes, two people briefed on the move said last week. New York-based Citigroup and Frankfurt-based Deutsche Bank also have dismissed, put on leave or suspended traders as part of the investigations, according to two more people.

Bloomberg News

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