U.S. regulators are nearing settlements with multiple banks and
broker ICAP PLC for allegedly manipulating a financial benchmark
used to calculate a wide range of interest-rate products, according
to people familiar with the matter.
Several banks are expected to each face hundreds of millions of
dollars in fines as part of agreements with the Commodity Futures
Trading Commission to resolve allegations their traders manipulated
the ISDAfix swap rate, the people said.
It is unclear which banks are close to settling the probes. U.S.
and European banks, including some of the more than one dozen banks
that were involved in setting the rate, have been under
investigation.
The commodities regulator also is weighing punishments against
London-based ICAP, the world's largest broker by any measure, which
administered the benchmark and allegedly helped the banks in their
attempted manipulation, the people said.
Regulators are wrestling with how stiff a punishment to
potentially impose against ICAP, according to the people. CFTC
sanctions could range from ordering extensive overhauls to a large
fine commensurate with the number of alleged attempts at
manipulating the benchmark, a person familiar with the probe said.
Because ICAP played a central role in the calculation of the
twice-daily rate, such a fine could jeopardize the company's
business, the person said. ICAP declined to comment. It has
previously said it is cooperating in the CFTC inquiry.
The $381 trillion market for interest-rate swaps is dominated by
big banks, which charge everyone from hedge funds to manufacturing
companies a premium for the trades designed to protect against
fluctuations in interest rates. The swaps are settled using the
benchmark rate.
U.S. authorities have been investigating the ISDAfix for several
years, as they work their way through probes of banks' alleged
manipulation of various benchmarks. Six global banks have paid more
than $9 billion to U.S. and European authorities to resolve charges
of foreign-currency manipulation, and a similar group of banks has
paid more than $8 billion to settle comparable charges of
manipulating the London interbank offered rate, or Libor. The
ISDAfix investigation isn't expected to result in fines as large as
those arising from the other two probes, people familiar with the
matter said.
In 2013, U.S. and British authorities fined ICAP $87 million for
its alleged role in the Libor scandal. ICAP neither admitted nor
denied wrongdoing.
The banks under investigation in the ISDAfix case have turned
over reams of data and documents to CFTC investigators as part of a
broad probe into whether traders skewed numbers used to calculate
the rate to benefit their bank's derivatives positions. According
to chat transcripts from banks' messaging systems reviewed by The
Wall Street Journal, some traders openly remarked on the
opportunities for manipulating the benchmark.
ICAP last month said that it incurred £ 4 million ($6.26
million) in legal costs. Also last month, Barclays PLC became the
first bank to settle allegations its traders worked to manipulate
the rate from 2007 to 2012, agreeing to pay a $115 million penalty
to the CFTC.
The British bank neither admitted nor denied the findings, which
included allegations that its traders executed bids and offers
leading up to the 11 a.m. window in which the rate is set in order
to move it. In announcing the settlement, Barclays described the
investigation as "industrywide."
The ISDAfix U.S. dollar rate is quoted twice a day, at 11 a.m.
and 3 p.m. ICAP polled a panel of banks about the rate during a
specific time period and asked them to submit estimates. Outliers
were eliminated and an average was taken from the remaining
contributions.
During the polling window, the banks could change their
contributions, which was allowed under the rules.Last year, global
trade group International Swaps and Derivatives Association Inc.
removed ICAP from its role in the ISDAfix and moved to an automated
rate-setting system.
U.S. criminal authorities were initially involved in the ISDAfix
investigation, but no criminal charges appear likely to result from
the probe, some of the people familiar with the matter said.
The corner of ICAP's Jersey City, N.J., office in which it
administered the ISDAfix benchmark became known as "Treasure
Island" because it was so lucrative for the brokers who worked on
the desk, former ICAP officials said.
When it is compiled, the ISDAfix relies on data about the prices
of certain instruments being manually typed in by ICAP employees.
One ICAP official told investigators that he witnessed data being
delayed and massaged to influence the benchmark's level to suit the
interests of the brokers' clients at banks, a former ICAP executive
said.
In one example cited by the CFTC, a Barclays trader in 2007 said
that the U.S. dollar ISDAfix was "f— random" and "what happens at
eleven is the bloody thing moves like half a basis point up and
down because everybody's trying to bang the screen," referring to
an attempt to move the ISDAfix level. A basis point is
one-hundredth of a percentage point.
In another exchange, Morgan Stanley's head of euro swaps
trading, Faisal Butt, wondered to a colleague at a rival bank in
the summer of 2009 why the other bank didn't do more trading
business involving the ISDAfix benchmark. "One thing I don't
understand with u guys," Mr. Butt wrote, according to a copy of the
Aug. 20 chat transcript reviewed by the Journal. "U guys don't have
much isdafix. As in im v surprised. Here it is much bigger, as in
the option guys r all over it and insist on moving screens
etc.…Gives good opportunities for others though!!!"
A person familiar with the exchange said Mr. Butt's statement to
"moving screens" appears to be a reference to get ICAP to tweak its
ISDAfix levels, which are transmitted onto traders' computer
screens.
Mr. Butt left Morgan Stanley in November 2012, according to U.K.
regulatory records, and now works at hedge fund Brevan Howard Asset
Management LLP. There is no indication that he is under
investigation, and he hasn't been accused of any wrongdoing.
Reached by phone in late 2013, Mr. Butt referred queries to a
Brevan Howard spokesman. Representatives of Brevan Howard and
Morgan Stanley declined to comment.
Write to David Enrich at david.enrich@wsj.com
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