Jake's View

UBS rate transgressions in Hong Kong are not what they appear to be

PUBLISHED : Sunday, 23 March, 2014, 3:47am
UPDATED : Sunday, 23 March, 2014, 3:47am

Six traders at Swiss lender UBS attempted to manipulate Hong Kong interbank offered rates following the rigging of similar London interbank rates, the Hong Kong Monetary Authority found after an investigation lasting more than a year.

SCMP, March 15

I have never been able to think of UBS as a ravening investment bank wolf. The picture that comes to mind is rather of a Swiss moo cow with a bell under its neck, chewing the cud on an alpine meadow.

UBS is basically a nice bunch of people who seem never quite to understand how banking is so widely regarded as carnivorous. Why must others think meat when UBS thinks milk?

But that's fine by predatory regulators who also inhabit this meadow. It gives them an easy victim.

I'm sure it dismays the UBS board that almost every time the headlines feature a new international financial scandal the bank's name appears in it somewhere. It's not as if the board condones errant practices. It's just that time and again some of the people the bank hires prove wrong 'uns.

This happens, I suppose, when cows hire wolves to join the herd. They don't stop being wolves, and cow minds are never quite devious enough to follow all the games that come easy to wolf minds.

In this case, however, I think the wolves, UBS-hired or otherwise, have done nothing wrong and it is the regulators who once again do not understand how life is lived on this pasture.

The crucial thing to bear in mind is that knowledge in financial matters is valuable and it doesn't come free.

A good example of this is interbank rates. How much do banks charge each other at any given point to borrow money from each other in any currency for any given period of time?

There is no set price on this as if it were a box of laundry soap in the supermarket. It depends on how the individual dealers in any bank dealing room see the market at any time. They take many different things into account, not all of them clearly defined or measured.

But one thing they do not like is to have people call up, get the quote they want and then just hang up again. This kind of toying with a financial market is frowned on. Be serious about either buying or selling or don't ask. Knowledge is valuable.

Calling to ask and then just hanging up again without dealing, however, is exactly how published interbank offered rates are established. The people who call want valuable knowledge without paying for it.

A good deal rests on this free knowledge. Many financial instruments are priced on the basis of it. I myself, for instance, for some time held a Hong Kong Bank perpetual that paid an interest rate of 25 basis points over the US dollar six-month London Interbank Offered Rate. That rate was a critical determinant of the price the market set on my investment.

So, yes, it is important to many people that published interbank rates reflect the market accurately. At the same it is also true that they assume they will get this knowledge for free.

It has now turned out that interbank dealers in Hong Kong, as well as in London, do not automatically share this assumption. As far as they are concerned, the published interbank rate has no skin in the game and they are thus free to tweak the quote they offer to suit how they are otherwise positioned in the market.

And I think they are absolutely right to do it that way. They owe it to their employers and their real clients. It is not their fault that there is a fundamental flaw at the heart of the whole concept of published interbank rates.

My advice to UBS, if the HKMA wants to get tough about it with them, is to say, "Right guys, go find someone else to quote Hibor for you then. We're out."

Oh, they have already done it, have they? Good thinking.