Libor

Libor case raises integrity issues

Evidence that interdealer brokers rigged the interbank numbers highlights the kind of pressure exerted on them by influential customers

PUBLISHED : Thursday, 26 September, 2013, 1:13pm
UPDATED : Friday, 27 September, 2013, 1:36am

Evidence that interdealer brokers at ICAP conspired to rig Libor for a bank trader raises questions over such firms' role as honest go-betweens among banks and highlights the pressure customers can put on them.

Documents released by Britain's Financial Conduct Authority (FCA) on Wednesday - when it and US authorities fined ICAP, three of whose former brokers face US criminal charges - show staff feared exposing manipulation by a bank trader for fear of losing the client's business.

"I am obviously totally reliant upon [Trader A] business and need to fall into line with his wishes," one ICAP broker was quoted as telling another in an e-mail.

ICAP was the first interdealer broker to be fined in a sweeping international investigation into how traders misled the compilers of daily Libor (London interbank offered rate) surveys in a conspiracy to skew the Libor - an average rate that measures how much banks expect to pay each other for loans.

Two former employees of smaller broker RP Martin are facing criminal charges in Britain over the Libor affair.

The role of the brokers is to match buyers and sellers among banks across a range of financial instruments, from basic bonds and currencies to derivative products, such as swaps. The brokers take a commission for arranging the trades.

"They were supposed to be honest brokers, but instead, they put their own financial interests ahead of that larger responsibility," US Attorney General Eric Holder said.

Broker-dealers spend their days reeling off prices down the phone or over internet messenger links to traders at banks and other clients. In their world, customers are known as "lines".

One ICAP manager was quoted by the FCA as saying that his job would be at risk if he made a complaint of misconduct to internal compliance officers that led to a trader being fired. "I go to compliance, [and if a trader] gets sacked, how many more lines have I got the next day? You have no lines."

Using underworld slang for a police informant, he added: "If you're known as a grass to traders, you're not going to do very well in terms of how many people want to talk to you."

The authorities allege brokers who helped mislead the Libor survey in order to favour their clients were well rewarded, directly in some cases and more generally in increased business.

A UBS bank trader in the ICAP case, who has also been charged in Britain and the US, was the biggest single client for the desk where some of the accused ICAP brokers worked. Between 2006 and 2009, his trades sometimes accounted for as much as 20 per cent of the desk's revenue.

Keeping the client meant bigger bonuses for the brokers.

ICAP's founder and chief executive, Michael Spencer, blamed "rotten apples" who no longer worked for him. He also said controls would be tightened. "This is not a cultural problem," he said. "It is very sadly a rotten apple situation here."

The FCA said ICAP as a firm did no wrong deliberately but it criticised the "poor culture and weak systems and controls".

It said the manager of one broker described his charge as operating "almost like his own little desk" and said he was unsure whether he was actually supposed to supervise him or was just meant to approve his annual leave requests.

Spencer said ICAP doubled its compliance staff to 50 for its 5,000 employees: "We are endeavouring and will endeavour to make sure absolutely something like this never happens again."

Using underworld slang for a police informant, he added: "If you're known as a grass to traders, you're not going to do very well in terms of how many people want to talk to you."

The authorities allege brokers who helped mislead the Libor survey in order to favour their clients were well rewarded, directly in some cases and more generally in increased business.

A UBS bank trader in the ICAP case, who has also been charged in Britain and the US, was the biggest single client for the desk where some of the accused ICAP brokers worked. Between 2006 and 2009, his trades sometimes accounted for as much as 20 per cent of the desk's revenue.

Keeping the client meant bigger bonuses for the brokers.

ICAP's founder and chief executive, Michael Spencer, blamed "rotten apples" who no longer worked for him. He also said controls would be tightened. "This is not a cultural problem," he said. "It is very sadly a rotten apple situation here."

The FCA said ICAP as a firm did no wrong deliberately but it criticised the "poor culture and weak systems and controls".

It said the manager of one broker described his charge as operating "almost like his own little desk" and said he was unsure whether he was actually supposed to supervise him or was just meant to approve his annual leave requests.

Spencer said ICAP doubled its compliance staff to 50 for its 5,000 employees: "We are endeavouring and will endeavour to make sure absolutely something like this never happens again."