This article was first published in Financier Worldwide, 1 Sept 12.
The allegations over attempts by banks around the world to manipulate benchmark interest rates are not confined to LIBOR, which hit the headlines on 27th June with the announcement of Barclays' settlement with a number of regulators for $453M. The allegations also concern manipulation by market participants of EURIBOR and TIBOR (for Japanese yen) rates. The allegations have surprised many, since the large number of banks comprised in the rate setting panels was ostensibly supposed to militate against the possibility of such manipulation.
The allegations are profoundly serious. For the participants the conduct, if proven, would be likely to result in substantial administrative penalties (some authorities can impose fines of up to 10% of gross worldwide turnover). There are also private damages actions which are already pending in some jurisdictions and which are threatened in others. For individuals, they could face criminal sanctions in addition to financial regulatory penalties.
Lastly, there is also the possibility of impairment of shareholder value through a fall in share price. Not much has been written about the actions of the competition authorities, because apart from the DoJ's participation in the Barclays' settlement, authorities have not issued charges publicly. In the EU, Competition Commissioner Almunia has signaled in his public statements that the market manipulation allegations are being given high priority in the Commission's competition investigations, which have been continuing for over a year. At issue is whether traders in competing institutions colluded in an effort to engineer a particular rate level. In competition law terms, under the provisions of the EU Treaty prohibiting collusive behaviour, it does not matter whether parties succeeded. It is still culpable if there are clear attempts to do so.
Academic studies in relation to the impact of cartel investigations on a defendant company’s share price, show a material fall in share value of the order of 6.5% over the life of the investigation. The fall in share price happens quickly, often has knock-on effects on rivals in the same sector and is sustained: in other words the fall in share price ought to grab the attention not just of compliance officers, but also of fund managers and main board directors.
Although the drama is complex and multi-national, a key question is why, in relation at least to LIBOR, is the UK not taking the lead? London claims to be the leading financial centre in the world and LIBOR is a London-based benchmark rate that is used extensively for many trillions of transactions. Yet the investigative lead was taken in the US, apparently by the Commodity Futures Trading Commission, which then led to a multi-regulator settlement that included the FSA. There are two interesting points to note. First, the settlement does show close co-operation between US and UK financial regulators. Secondly, it does not include the competition regulators in the EU – pointedly the EU Commission investigation which suggests that it was still at an early stage.
The drama is complicated by a number of features. It involves the alleged collusion by banks that were panel members for LIBOR, TIBOR and EURIBOR - and there are different panels for each. Regulators in many countries are involved including the US, UK, Japan, Canada and Switzerland. The legal issues are complex and the investigations involve both financial regulators and antitrust regulators. Within some markets powers of regulators are concurrent, in other markets sanctions may be administrative or a combination of civil and criminal. And one characteristic affecting all regulators is the sheer volume of documentation involved, including electronic chat room material - some individual email strings run to over 100,000 pages. In the absence of applications for immunity or leniency (which involve confessions of wrong-doing), the regulators have an evidential mountain to climb and are subject to strict rules preventing the sharing of documents with other regulators in the absence of party consent.
How will the regulators respond to the political howls for retribution and is it feasible that any semblance of regulatory balance and coherent structure could emerge? We have already seen in the UK the announcement of proposals for the re-organisation of LIBOR, but this is a drama which will be worth watching.