London Interbank Offered Rate

Benchmarks: Agreement Reached on ECON Committee

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On March 31, the European Parliament’s Committee on Economic and Monetary Affairs (ECON) adopted its report on benchmarks. Key issues include: The Economic and Monetary Affairs Committee backed a draft EU law to make the benchmarks more trustworthy. The text aims to clean up the benchmark-setting process by curbing conflicts of interest like those that led to the London Interbank Offered Rate (LIBOR) rigging scandals of recent years. The setting of critical benchmarks that affect more than one country would be overseen by a “college” of supervisors, including the European Securities and Markets Authority (ESMA) and other competent authorities.

Curbing critical conflicts of interest

The draft law aims to curb conflicts of interest in setting “critical” benchmarks, such as LIBOR and EURIBOR, which, by influencing financial instruments and contracts with an average value of at least €500 billion, could affect the stability of financial markets across Europe.

The final decision on whether a benchmark is “critical” would be up to ESMA and national authorities, but a national authority could also deem a benchmark administered within its territory to be critical if it has a “significant” impact on the national market.

Critical benchmark administrators would have to have a clear organizational structure to prevent conflicts of interest, and be subject to effective control procedures.

Critical benchmark-setting data would have to be verifiable and come from reliable contributors who are bound by a code of conduct for each benchmark. Contributors, such as banks contributing data needed to determine a critical benchmark, would have to notify the benchmark administrator and the relevant authority if they wished to cease doing so, but would nonetheless have to continue doing so until a replacement were found.

Transparency requirements

All benchmark administrators would have to be registered with the ESMA and would have to publish a “benchmark statement” defining precisely what their benchmark measures and to what extent it is reliable. They would also have to publish or disclose existing and potential conflicts of interest and meet accountability, record keeping, audit and review requirements.

The text will be put to a vote by Parliament as a whole to consolidate Parliament’s position before its three-way negotiations with EU member states and the European Commission.

ICAP Fined £14 Million by FCA

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The FCA has fined broker ICAP Europe Ltd £14 million for misconduct regarding the London Interbank Offered Rate (LIBOR), according to the final notice published by the FCA on September 25.

ICAP was found to be in breach of Principle 3 (management and control) and Principle 5 (market conduct) of the FCA’s Principles for Businesses.  According to an FCA press release, ICAP is the first broking firm to be fined for LIBOR-related failings.  Final Notice.  Press Release.

Parliamentary Commission on Banking Standards Appointed

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On July 18, Parliament published a press release announcing that a parliamentary commission on banking standards has been appointed. Press Release.

The commission will consider and report on:

  • Professional standards and culture of the UK banking sector, taking account of regulatory and competition investigations into the London Interbank Offered Rate (LIBOR) rate-setting process.
  • Lessons to be learned about corporate governance, transparency and conflicts of interest, and their implications for regulation and for government policy.

The commission has been asked to report on legislative action no later than December 18 (before the Banking Reform Bill is published) and on other matters as soon as possible afterwards.

SFO Press Release on Manipulation of LIBOR

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On July 2, the Serious Fraud Office (SFO) published a press release regarding the manipulation of the setting of the London Interbank Offered Rate (LIBOR). Press release.

In the press release, the SFO stated that it had been working closely with the FSA and now that the FSA has concluded its investigation into the regulatory misbehaviour, the SFO is considering whether it is both appropriate and possible to bring criminal prosecutions.

The SFO hopes to come to a conclusion regarding possible criminal prosecutions within a month. It is also working with the relevant authorities that are carrying out equivalent investigations in other jurisdictions.

On July 2, a statement made by George Osborne, Chancellor of the Exchequer on LIBOR and related reforms concerning the banking sector was also published. This included an initiative to establish a joint committee to conduct an inquiry into professional standards in the banking industry. Statement.

FSA Fines Barclays £59.5 Million for Manipulation of LIBOR

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On 27 June 2012, the FSA published the final notice issued to Barclays Bank plc, detailing a £59.5 million fine for misconduct relating to its submission of rates that formed part of the London Interbank Offered Rate (“LIBOR”) and the Euro Interbank Offered Rate (“EURIBOR”). This is the largest ever fine that the FSA has imposed. Final Notice.

In particular, Barclays breached the following Principles:

  • Principle 5 (market conduct) – Barclays was found to have breach Principle 5 by making US dollar LIBOR and EURIBOR submissions that took into account requests made by interest rate derivatives traders.
  • Principle 3 (management and control) – Barclays did not have adequate risk management systems or effective controls in place relating to its LIBOR and EURIBOR submission process.
  • Principle 2 (skill, care and diligence) – Barclays failed to conduct its business with due skill, care and diligence when considering issues raised internally relating to its LIBOR submissions.

In addition to the fine by the FSA, the U.S. Commodity Futures Trading Commission fined Barclays $200 million, and Barclays agreed to pay a penalty of $160 million as part of an agreement with the U.S. Department of Justice.

The Barclays settlement is the first settlement announced in connection with the LIBOR probe, with regulators investigating more than 20 banks.