C Citigroup Inc

By Aruna Viswanatha 

In the summer of 2010, Citigroup Inc. traders circulated a news report about attempts to manipulate a financial benchmark used to calculate a wide range of interest-rate products. One messaged: "GAME OVER." "[O]h jesus do I want to read this?," chimed in another, according to a document recounting the exchanges released Wednesday by regulators.

By then U.S. regulators and law enforcement authorities were deep into multiple investigations into whether top global banks tried to game interest rate benchmarks.

Six years later, Citigroup Inc.'s banking unit signed a settlement, announced Wednesday, over the allegations, the latest bank to enter into an agreement following more than a dozen settlements to resolve banks' alleged rigging. Citigroup agreed to pay $425 million to end long-running civil probes into the bank's alleged manipulation of two key benchmarks. It is the first U.S. bank to resolve claims related to the Libor benchmark.

Specifically, the bank agreed to pay $250 million to resolve claims from the Commodity Futures Trading Commission that it tried to manipulate the ISDAFIX benchmark swaps rate, which is used to settle interest rate swaps, between 2007 and 2012. It agreed to pay an additional $175 million to resolve claims from the regulator that it tried to rig the Yen Libor and Euroyen Tibor interest rate benchmarks in 2010. Libor and Tibor are based on banks' borrowing costs and serve as benchmarks for trillions of dollars in financial instruments.

A half-dozen European banks have already settled criminal or civil claims tied to Libor rigging, but Citi is the first U.S. bank to do so.

The initial Libor investigations quickly expanded to examine similar patterns in other products. Last May, five global banks including Citi and J.P. Morgan Chase & Co. agreed to pay more than $5 billion to resolve probes into whether traders colluded to move foreign currency rates for their own benefit.

"We will vigorously continue to investigate any efforts to manipulate financial benchmarks," the CFTC's enforcement director, Aitan Goelman, said in announcing Wednesday's Citi agreement.

Citi said in a statement it had adopted "industry-wide reforms" in participating in benchmark rates and made "substantial investments" in controls to monitor for inappropriate behavior. "These settlements represent a significant step for Citi in resolving its legacy benchmark rate investigations," the bank said. It neither admitted nor denied the agency's findings.

Citi is the second bank after Barclays PLC to resolve claims related to the ISDAfix benchmark, which firms ranging from hedge funds to manufacturing companies use to settle swaps designed to protect against fluctuation in interest rates.

A Justice Department spokesman said the department had closed its ISDAfix investigation into Citigroup and Barclays, but declined to comment on whether it had ended its probe into Libor manipulation for Citi.

According to the CFTC order, Citi's customers began to notice at some point after 2007 potential issues with how the rate was set. One customer sent a message to a Citi trader, according to the settlement: "[E]ach person tells me that there is no manipulation by the traders; however, the coincidence of us losing on everyone but one fixing...is starting to get old."

The CFTC on Wednesday also accused Citi of falsely reporting rates used to determine U.S. dollar Libor during the 2008 financial crisis to make the bank appear healthier than it was. Libor, the London interbank offered rate, serves as an index for $500 trillion in products, including loans and interest rate futures contracts.

Both benchmarks are largely set via a panel of banks who submit daily their own borrowing costs, in the case of Libor, or their offers and bids for interest rate swaps, in the case of ISDAfix. (The ISDAfix rate is also influenced by actual trades.)

Citi and other banks misreported their own rates in order to benefit trading positions dependent on those benchmarks, regulators said.

The Citi Libor allegations largely revolve around one trader, Tom Hayes, who is serving an 11-year prison sentence in London for trying to rig the rate.

The CFTC order also identifies Mr. Hayes's boss, a senior manager on the Tokyo interest rate derivatives trading desk, Chris Cecere, who, it says, pressured Tibor submitters to adjust submissions to benefit Mr. Hayes' positions. On a few occasions, the CFTC said, Mr. Cecere's requests were taken into account. Neither man was named by the CFTC, but both have been identified in previous cases. Mr. Cecere couldn't be located for comment.

Citigroup hired Mr. Hayes from UBS to enhance its reputation in the Tokyo derivatives market in 2009, authorities said, and Mr. Hayes used his contacts at other panel banks to influence Yen Libor submissions. According to the order, the Tibor submitters eventually grew tired of Mr. Cecere's requests and elevated concerns to management. in June 2010 the bank erected a firewall to limit such requests. Citigroup fired Mr. Hayes in September 2010.

Separately, according to the CFTC, in the spring of 2008 through the summer of 2009, Citi based its U.S. dollar Libor submissions "on a desire to avoid generating negative media attention and to protect Citi's reputation in the market," even though it was experiencing liquidity concerns. According to the filing, one Citi Libor submitter said, "note that our 1-6 mths LIBORs were the highest out of all contributors. Given the potential negative publicity that this could have I would go lower..."

The Wall Street Journal in 2008 reported on banks' potential fibbing on their Libor submissions, sparking the CFTC investigation.

The bank knew it was under investigation, but managers didn't report Mr. Hayes's attempted manipulation even though he talked openly about how he did it at his prior bank, the CFTC said. For example, according to the order, Mr. Hayes told a manager that he "just calls his cash guys and asks them to move the LIBORs up or down, depending on how his fixings were...."

On ISDAFIX, Citi also bid and executed trades in certain interest rate products at times and prices designed to influence the daily published rate, the regulator said. One Citi trader described ISDAfix in electronic communications as "surprising[ly] easy to push," according to the CFTC order.

As early as 2007, after one Citi swaps trader commented about market illiquidity around the 11 a.m. setting of the rate, another Citi trader said, according to the order: "[I] suspect it's because of Isdafix...[T]hat's when people start scrooing [sic] around with things."

The bank changed its ISDAfix submissions process in October 2012, the regulator said.

Write to Aruna Viswanatha at Aruna.Viswanatha@wsj.com

(END) Dow Jones Newswires

May 25, 2016 16:03 ET (20:03 GMT)

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