On December 27, 2012, Judge Harold Baer, Jr. of the United States District Court for the Southern District of New York dismissed an action brought by Woori Bank against RBS Securities and related entities claiming fraud, negligent misrepresentation, and unjust enrichment. Woori alleged that defendants knowingly marketed CDOs based on RMBS that had a greater risk than their ratings suggested, and that RBS fraudulently and negligently induced Woori to buy those CDOs. Further, Woori alleged that RBS concealed or failed to properly disclose their efforts to manipulate LIBOR rates. The court dismissed the fraud claim because Woori’s allegations did not specifically connect RBS’s alleged knowledge of problems or suspect behavior to the transactions at issue. Further, the court found that Woori was unable to show with sufficient specificity any facts that demonstrated RBS had created an inherently unfair transaction by failing to disclose information and accordingly dismissed the negligent misrepresentation claim. Decision.
libor
Libor Update
On December 11, the Serious Fraud Office (the SFO) published a press release stating that three men had been arrested and interviewed in relation to its investigation into the manipulation of LIBOR. Although the three men have not been charged with wrongdoing, the move is being reported as indicative of a shift of focus in the LIBOR investigation away from institutions and onto individuals, as well as a shift of focus away from banks and onto brokers.
Consultation on Draft Secondary Legislation to Regulate LIBOR
On November 28, HM Treasury published a consultation paper on draft secondary legislation to regulate LIBOR and make its manipulation a criminal offence.
The draft Financial Services and Markets Act (Regulated Activities) (Amendment) Order 2013 proposes two new regulated activities:
- providing information in relation to a regulated benchmark (currently LIBOR is the only proposed regulated benchmark, although there is provision to add others); and
- administering a regulated benchmark.
A further draft order, relating to “misleading statements” specifies the investments, activities and benchmarks in relation to three new criminal offences dealing with making misleading statements and conducting misleading practices. These offences will be created by draft amendments to the Financial Services Bill 2012-2013 and will result in the repeal of section 397 of the Financial Services and Markets Act 2000.
It is intended that the Financial Services Bill will receive royal assent before the end of 2012 and that the draft secondary legislation will be considered by Parliament in early 2013. Comments on the consultation must be submitted before December 24.
Communiqué of the Ministers of Finance and Central Bank Governors of the G20
On November 6, the Ministers of Finance and Central Bank Governors of the G20 published a communiqué following their meeting on November 4 – 5 in Mexico City. The communiqué stated that the G20 Ministers of Finance remain committed to the full, timely and consistent implementation of the financial regulation agenda, and in particular:
- welcome the recent decision by European leaders to agree on a legislative framework for a single supervisory mechanism by January 1, 2013;
- agree to put in place legislation and regulation for OTC derivatives reforms promptly, and to act by the end of 2012 to identify and address issues with the cross border application of existing rules;
- commit to make the necessary changes to resolution regimes to allow for the resolution of systemically important financial institutions;
- call for the publication of finalised policy measures for the oversight and regulation of shadow banking in time for the G20 St Petersburg summit on June 8, 2013;
- are concerned about the slow progress towards a single set of high quality accounting standards; and
- welcome action taken to address weaknesses and restore confidence in LIBOR and in other benchmark and index setting practices.
Global Financial Markets Association Letter Outlining Principles for Financial Benchmarks
On September 7, the Global Financial Markets Association (GFMA) published a letter setting out principles that it proposes to assist in the setting of global financial benchmarks such as LIBOR. The principles outline a set of best practice standards for conducting benchmark price assessments. The principles state that the overall responsibility for the benchmark process lies with the entity or group that develops and issues the benchmark (the “sponsor”). The Principles are grounded in three fundamental sponsor obligations, which GFMA believe should be applied in a manner commensurate with the significance of the benchmark:
- Governance: A sponsor should ensure that there is an appropriate governance structure for oversight of the benchmark;
- Benchmark Methodology and Quality: A sponsor should employ sound design standards in devising the benchmark and ongoing processes related to its operations; and
Controls: A sponsor should ensure that there is an appropriate system of controls promoting the efficient and sound operation of the benchmark process and should implement such a system of controls.
European Commission Consults on the Regulation of Benchmarks and Market Indices
On 5 September 2012, the European Commission published a consultation document seeking views on issues relating to a possible framework for the regulation of the use and production of indices serving as benchmarks in financial and other contracts. The consultation follows the recent revelations regarding the alleged manipulation of the LIBOR and EURIBOR benchmarks.
The Commission has requested views on the following points:
- Information on indices and benchmarks – their definition, their purposes, the methodology behind their production and the persons who produce them.
- Governance and transparency issues concerning the calculation of benchmarks, including data usage and persons contributing such data.
- The use and purposes of benchmarks.
- The ways in which private and public bodies provide benchmarks.
- The potential impact of regulating benchmarks, including the international issues that will need to be considered.
The Commission has requested comments on the consultation by 15 November 2012.
Treasury Committee Publishes LIBOR Report
On August 18, the Treasury Select Committee (TSC) published its report “Fixing LIBOR: some preliminary findings“. Volume I (Report). Volume II (Oral and Written Evidence).
As well as conclusions relating to the conduct of Barclays and the FSA’s LIBOR investigation, the report also includes a number of points of general regulatory interest including:
- Firms must be encouraged also to self-report.
- The committee requires the FSA to report to it on how it will alter its supervisory efforts to counter weak compliance by firms in future.
- Wheatley (FSA) review should consider the case for amending the present law by widening the meaning of market abuse to include the manipulation, or attempted manipulation of LIBOR and other benchmark rates.
- A formal and comprehensive framework needs to be put in place by the Serious Fraud Office (SFO) to ensure effective relations in the investigation of serious fraud in the financial markets.
The BoE submitted a response to the report on August 18. Response.
Wheatley Review Discussion Paper Outlines Initial Thoughts on LIBOR Reform
On August 10, HM Treasury published a discussion paper outlining initial thinking on the review of the London Interbank Offered Rate (LIBOR) being undertaken by Martin Wheatley, Chief Executive-designate of the Financial Conduct Authority (FCA). Discussion Paper.
The Discussion Paper states that the review of LIBOR will consider and consult on two options:
- Strengthening LIBOR. The issues identified could be tackled through significant reform of the existing system. Preserving the LIBOR system would limit the costs of transferring existing contracts, whilst reforms could address failings in the system.
- Finding an alternative to LIBOR. If the problems with LIBOR cannot be resolved, new benchmarks could be recommended to replace some or all of LIBOR’s role in financial markets.
Comments on the discussion paper are requested by September 7 with Mr. Wheatley aiming to present his findings and recommendations by the end of September.
SFO Confirms Criminal Offences are Capable of Covering LIBOR Conduct
On July 30, the Serious Fraud Office (“SFO”) published a press release stating that the Director of the Serious Fraud Office, David Green QC, is satisfied that existing criminal offences are capable of covering conduct relating to the alleged manipulation of LIBOR and related interest rates. Press Release.
Terms of Reference for Wheatley Review of LIBOR Published
On July 30, HM Treasury published a press release setting out the terms of reference for the independent review of LIBOR to be carried out by Martin Wheatley, Chief Executive-designate of the Financial Conduct Authority. Press Release.
Issues to be considered are:
- Whether participation in the setting of LIBOR should be a regulated activity.
- The construction of LIBOR, including the feasibility of using actual trade data to set the benchmark.
- The appropriate governance structure for LIBOR.
- The potential for alternative rate-setting processes.
- The financial stability consequences of a move to a new regime and how a transition could be appropriately managed.
- The adequacy and scope of sanctions for tackling LIBOR abuse. In particular, it will cover the scope of the UK authorities’ civil and criminal sanctioning powers with respect to financial misconduct, particularly market abuse and abuse relating to the setting of LIBOR and equivalent rate-setting processes, as well as the FSA’s approved persons regime and investigations into market misconduct.
There will be a four-week public consultation starting on August 10 with Mr. Wheatley aiming to publish his conclusions and recommendations by the end of September. The UK government intends to implement the findings of the review in the Financial Services Bill 2012-13.