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Regulators investigate second Libor-like price fixing scandal by banks

Finance Blogger: Anthony Harrington Anthony Harrington

A new price fixing scandal involving some of the major banks has come to light, and looks as if it could be on a comparable scale to the Libor scandal. The latter saw at least three banks, and probably an additional ten or more, involved in fixing the daily quoting of inter-bank borrowing rates (Libor) on a market worth upwards of $500 trillion. Like Libor, the interest rate swap fix, known as ISDAfix, is also set by banks through a voluntarily reporting process that has banks phoning through the swap rates they are striking each morning. Like Libor, ISDAfix too, seems to have been manipulated to the benefit of traders at some major banks.

The interest rate swap market is worth $379 trillion so a basis point or two can net a manipulating bank millions. US regulators have now subpoenaed some 15 banks and some brokers at ICAP, the company that collects the interest rate swap data. The probe is being carried out by the US Commodities Futures Trading Commission.

As Bloomberg Businessweek explains, "ICAP publishes the ISDAfix prices each morning at 11.00 am after 13 household name banks submit bids and offers for interest rate swaps in various countries".

These numbers are updated through the day and displayed on an electronic screen, known to insiders as 19901. The numbers are followed by some 6,000 specialists with an interest in the swaps market. Their ranks include corporate treasurers, money managers, pension fund advisers and basically anyone else with an interest in using swaps to hedge out interest rate risk (the risk that the bank base rate will move against you because the bank raises or lowers its rates).

Bloomberg points out that on a $500 million swap that matures in 20 years a delay that prevents the instrument from moving one basis point would net the dealer, and thus his or her bank, $1 million in profit. So there is plenty of incentive to fudge the price to favor a dealer. According to the Telegraph the CEO of Tullett Prebon, Terry Smith, alerted the International Swaps and Derivatives Association (ISDA) two years ago to the fact that ISDAfix was vulnerable to price fixing. The Telegraph's Louise Armistead says that the Telegraph has seen a letter that Smith wrote to the then-chief executive of ISDA, Conrad Volstad warning him that the ISDAfix rating system needed to be completely overhauled to remove the risk of price fixing. Volstad told Smith that the system "was working fine".

In the light of the Libor scandal, however, the authorities are no longer disposed to take bland assurances at face value, and the arrest and questioning of a number of brokers and bankers, which is still going forward, shows that the good old days where everyone assumed that a banker's word was his/her bond have vanished like dew in the African sun. Smith wanted an independent "large data distributor" to aggregate prices from the banks. So far, there is little by way of hard fact to go on and all is supposition and hearsay, apart from the certainty that the CFTC has launched an investigation.

However, what the Libor rigging incident shows is that if a benchmark is accessible to rigging, then it will be rigged - that's the "natural" and easiest route for traders to go down, since many of them appear to take the view that "if you ain't cheating you ain't trying." Regulation it seems still has a long way to go and regulators are clearly still struggling and stumbling in their efforts to contain "too-big-to-fail" banks.

Further reading on bank regulation:

Tags: bank regulation , banks , Bloomberg , city , ICAP , interest rate swaps , ISDAfix , Libor , Libor rate fixing , libor scandal , London , regulation , Scandal
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