Regulators probing the alleged manipulation of global interest rates are focusing on what traders involved in setting the benchmark say were routine discussions condoned by their superiors.

Staff responsible for submissions to the London interbank offered rate regularly discussed where to set the measure with traders sitting near them, interdealer brokers and counterparts at rival banks, according to money-market traders with direct knowledge of procedures at three firms. The talks became common practice after money markets froze in 2007, making it difficult for individual bankers to gauge the cost of borrowing from other lenders, said the traders, who asked not to be identified because they weren't authorized to speak about the subject.

“A few hundred people, mostly based in one city and sitting in close proximity to each other, set an index rate for trillions of dollars of securities with little or no oversight,” said Mark Sunshine, chief executive officer and chairman of Veritas Financial Partners, a Florida-based firm that provides loans to businesses and real estate companies. “That cannot continue. The mechanism itself, the oversight and the penalties if violated, are woefully inadequate.”