By Pam Martens: June 27, 2012
The Commodity Futures Trading Commission (CFTC) has released the details of its $200 million settlement with Barclays for its attempts to rig interest rate markets. The U.S. Department of Justice, which in decades past took market manipulation seriously, has filed no criminal charges here. The DOJ let Barclays off the hook with a $160 million penalty and an agreement that it would continue to cooperate with the DOJ. The UK’s Financial Services Authority imposed a penalty of £59.5 million against the Bank.
According to the CFTC, orders came down from senior management at Barclays with one hapless employee responding: “following on from my conversation with you I will reluctantly, gradually and artificially get my libors in line with the rest of the contributors as requested. I disagree with this approach as you are well aware. I will be contributing rates which are nowhere near the clearing rates for unsecured cash and therefore will not be posting honest prices.”
Barclays is the first to settle the LIBOR/Euribor market manipulation matter. Major Wall Street firms are believed to be under similar investigations.
The full release from the CFTC follows:
CFTC Orders Barclays to pay $200 Million Penalty for Attempted Manipulation of and False Reporting Concerning LIBOR and Euribor Benchmark Interest Rates
The order finds that Barclays attempted to manipulate interest rates and made related false reports to benefit its derivatives trading positions. The order also finds that Barclays made false Libor reports at the direction of members of senior management to protect its reputation during the global financial crisis.
Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) issued an Order today filing and settling charges against Barclays PLC, Barclays Bank PLC (Barclays Bank) and Barclays Capital Inc. (Barclays Capital) (collectively Barclays or the Bank). The Order finds that Barclays attempted to manipulate and made false reports concerning two global benchmark interest rates, LIBOR and Euribor, on numerous occasions and sometimes on a daily basis over a four-year period, commencing as early as 2005.
According to the Order, Barclays, through its traders and employees responsible for determining the Bank’s LIBOR and Euribor submissions (submitters), attempted to manipulate and made false reports concerning both benchmark interest rates to benefit the Bank’s derivatives trading positions by either increasing its profits or minimizing its losses. This conduct occurred regularly and was pervasive. In addition, the attempts to manipulate included Barclays’ traders asking other banks to assist in manipulating Euribor, as well as Barclays aiding attempts by other banks to manipulate U.S. Dollar LIBOR and Euribor.
The Order also finds that throughout the global financial crisis in late August 2007 through early 2009, as a result of instructions from Barclays’ senior management, the Bank routinely made artificially low LIBOR submissions to protect Barclays’ reputation from negative market and media perceptions concerning Barclays’ financial condition.
The CFTC Order requires Barclays to pay a $200 million civil monetary penalty, cease and desist from further violations as charged, and take specified steps, such as making the determinations of benchmark submissions transaction-focused (as set forth in the Order), to ensure the integrity and reliability of its LIBOR and Euribor submissions and improve related internal controls.
“The American public and our markets rely upon the integrity of benchmark interest rates like LIBOR and Euribor because they form the basis for hundreds of trillions of dollars of transactions and affect nearly every corner of the global economy,” said David Meister, the CFTC’s Director of Enforcement. “Banks that contribute information to those benchmarks must do so honestly. When a bank acts in its own self-interest by attempting to manipulate these rates for profit, or by submitting false reports that result from senior management orders to lower submissions to guard the bank’s reputation, the integrity of benchmark interest rates is undermined. The CFTC launched this investigation to protect the markets and the public from such illegal conduct, and today’s action demonstrates that we will bring the full force of our authority to bear as we carry out that mission.”
LIBOR and Euribor
LIBOR – the London Interbank Offered Rate – is among the most important benchmark interest rates in the world’s economy, and is a key rate in the United States. LIBOR is based on rate submissions from a relatively small and select panel of major banks, including Barclays, and is calculated and published daily for several different currencies by the British Banker’s Association (BBA). Each panel bank’s submission is also made public, and the market can therefore see each bank’s independent assessment of its own borrowing costs. LIBOR is supposed to reflect the cost of borrowing unsecured funds in the London interbank market.
Euribor, which is calculated in a similar fashion by the European Banking Federation (EBF), is another globally important rate that measures the cost of borrowing in the Economic and Monetary Union of the European Union.
LIBOR impacts enormous volumes of swaps and futures contracts, commercial and personal consumer loans, home mortgages and other transactions. For example, U.S. Dollar LIBOR is the basis for the settlement of the three-month Eurodollar futures contract traded on the Chicago Mercantile Exchange (CME), which had a traded volume in 2011 with a notional value exceeding $564 trillion. In addition, according to the BBA, swaps with a notional value of approximately $350 trillion and loans amounting to $10 trillion are indexed to LIBOR. Euribor is also used internationally in derivatives contracts. In 2011, over-the-counter interest rate derivatives referenced to Euro rates had a notional value in excess of $220 trillion, according to the Bank for International Settlements. LIBOR and Euribor are relied upon by countless large and small businesses and individuals who trust that the rates are derived from candid and reliable submissions made by each of the banks on the panels.
Barclays’ Unlawful Conduct to Benefit Derivatives Trading Positions
As the Order shows, Barclays, in pursuit of its own self-interest, disregarded the fundamental principle that LIBOR and Euribor are supposed to reflect the costs of borrowing funds in certain markets. Barclays’ traders located at least in New York, London and Tokyo asked Barclays’ submitters to submit particular rates to benefit their derivatives trading positions, such as swaps or futures positions, which were priced on LIBOR and Euribor. Barclays’ traders made these unlawful requests routinely, and sometimes daily, from at least mid-2005 through at least the fall of 2007, and sporadically thereafter into 2009. The Order relates that, for example, one trader stated in an email to a submitter: “We have another big fixing tom[orrow] and with the market move I was hoping we could set [certain] Libors as high as possible.”
In addition, certain Barclays Euro swaps traders, led at the time by a senior trader, coordinated with and aided and abetted traders at other banks in each other’s attempts to manipulate Euribor, even scheming to impact Euribor on key standardized dates when many derivatives contracts are settled or reset.
The traders’ requests were frequently accepted by Barclays’ submitters, who emailed responses such as “always happy to help,” “for you, anything,” or “Done…for you big boy,” resulting in false submissions by Barclays to the BBA and EBF. The traders and submitters also engaged in similar conduct on fewer occasions with respect to Yen and Sterling LIBOR.
Barclays’ Unlawful Conduct at the Direction of Senior Management
The CFTC Order also finds that Barclays, acting at the direction of senior management, engaged in other serious unlawful conduct concerning LIBOR. In late 2007, Barclays was the subject of negative press reports raising questions such as, “So what the hell is happening at Barclays and its Barclays Capital securities unit that is prompting its peers to charge it premium interest in the money market?” Such negative media speculation caused significant concern within Barclays and was discussed among high levels of management within Barclays Bank. As a result, certain senior managers within Barclays instructed the U.S. Dollar LIBOR submitters and their supervisor to lower Barclays’ LIBOR submissions to be closer to the rates submitted by other banks and not so high as to attract media attention.
According to the Order, senior managers even coined the phrase “head above the parapet” to describe high LIBOR submissions relative to other banks. Barclays’ LIBOR submitters were told not to submit at levels where Barclays was “sticking its head above the parapet.” The directive was intended to fend off negative public perceptions about Barclays’ financial condition arising from its high LIBOR submissions relative to the submissions of other panel banks, which Barclays believed were too low given the market conditions.
Despite concerns being raised by the submitters that Barclays and other banks were, for example, “being dishonest by definition” and that they were submitting “patently false” rates, the submitters followed the directive and submitted artificially lower rates. The senior management directive for low U.S. Dollar LIBOR submissions occurred on a regular basis during the global financial crisis from August 2007 through early 2009, and, at limited times, for Yen and Sterling LIBOR during the same period. As the U.S. Dollar senior submitter said in October 2008 to his supervisor at the time, “following on from my conversation with you I will reluctantly, gradually and artificially get my libors in line with the rest of the contributors as requested. I disagree with this approach as you are well aware. I will be contributing rates which are nowhere near the clearing rates for unsecured cash and therefore will not be posting honest prices.”
Barclays’ Obligations to Ensure Integrity and Reliability of Benchmark Interest Rates
In addition to the $200 million penalty, the CFTC Order requires Barclays to implement measures to ensure that its submissions are transaction-focused, based upon a rigorous and honest assessment of information and not influenced by conflicts of interest…Among other things, the Order requires Barclays to:
- Make its submissions based on certain specified factors, with Barclays’ transactions being given the greatest weight, subject to certain specified adjustments and considerations;
- Implement firewalls to prevent improper communications including between traders and submitters;
- Prepare and retain certain documents concerning submissions, and retain relevant communications;
- Implement auditing, monitoring and training measures concerning its submissions and related processes;
- Make regular reports to the CFTC concerning compliance with the terms of the Order;
- Use best efforts to encourage the development of rigorous standards for benchmark interest rates; and
- Continue to cooperate with the CFTC.