LIBOR: The Final Nail in the Coffin?

Strong conflict can be observed in the prediction made by Dixit Johsi, who thinks that eliminating the use of LIBOR from the global financial system may present a Herculean task that could be “bigger than Brexit”, and the view espoused by FCA’s boss Andrew Bailey this July in Interest rate benchmark reform: transition to a world without LIBOR who is adamant that the use of the discredited rate must end by 2021. In an earlier speech on the future of LIBOR last July, Bailey stressed the need to transition away from LIBOR and the importance of doing so has not changed. However, Johsi, who is the group treasurer of Deutsche Bank and is also a board member of the International Swaps and Derivatives Association, is of the view that ending the use of LIBOR is a unenviable “mammoth task” which is “bigger than Brexit” on the overall scale of things. In his  speech Bailey reiterated the notorious status that LIBOR had attained after the global financial crisis (GFC) prior to which no one knew of its significance in the global marketplace. “Before then it was largely taken for granted, part of the financial landscape,” it how Bailey put it while stressing that the FCA has regulated LIBOR since April 2013 and that significant improvements have been made in its submission and administration. He said that the reforms of recent years had ensured that no further illegality took place but it was equally Bailey’s position that LIBOR must be terminated in its present form because the absence of active underlying markets raises a serious question about the sustainability of the LIBOR benchmarks that are based upon these markets.

But since “LIBOR is a public good” regulators were eager to protect the the interests of all involved by sustaining the current arrangements until such time as alternatives are available and transition arrangements are sufficiently well advanced. A proxy LIBOR was discussed.  Yet despite the need for a frictionless transition, Bailey is now saying that the time has come to put an end to the use of LIBOR and he therefore stressed that firms should not see phasing out LIBOR as a “black swan” event or a measure of last resort because it is not a “remote probability” and the benchmark’s termination is inevitable. He is pleased with the efforts made to change things thus far but he is not happy about the pace of the transition. The FCA is clear that ensuring that the transition from LIBOR to alternative interest rate benchmarks is orderly will contribute to financial stability and that “misplaced confidence in LIBOR’s survival will do the opposite, by discouraging transition.” Alternatives to LIBOR in the form of SOFR, SONIA, SARON and TONA are already operating globally. The Bank of England has started to publish a reformed and strengthened SONIA. Bailey informed us that it is now supported by an average of 370 transactions per day, compared with 80 before the reform.

Banking and Misconduct: A Critique of the Cure of Culture

Strangely enough, after controversially abandoning a long-awaited revolutionary review of culture in banking, the FCA has started to invoke the mantra of culture yet again. In that regard, Transforming culture in financial services DP18/2 advocates a pressing need for financial firms to clean up their act because cultural complications have been “a key root cause of the major conduct failings that have occurred within the industry in recent history.” Being prescriptive about the panacea of culture is quite an odd thing for the FCA to indulge in yet again. Worse still, the idea that a wider culture is to blame makes a mockery of individual culpability and provokes irresponsibility. The approach is misconceived and fundamentally flawed. Jonathan Davidson, the FCA’s director of supervision, predicts at the outset of the discussion paper that organisational and societal change cannot be brought about by a “quick fix” because of “the complexity of human dynamics.” Events demonstrate that the FCA is in denial about the reality of things. Blaming bad culture has failed as a defence for many people such as Tom Hayes, Jonathan Mathew, Jay Merchant and Alex Pabon who were prosecuted and jailed for benchmark rigging. The FCA’s latest theory is that culture is manageable despite being immeasurable. On any view, this is a fallacious argument because the calculus of culture is not only measurable but has already been clearly recorded as conduct costs, £264 billion between 2012-2016, by the CCP Research Foundation. The systematic arrangement and coding of these costs shows that bad culture and culpability can be readily measured.

Generally, one can only agree with the practical effect of many a cultural mission statement, when everyday conduct, ethics and accountability are what will truly drive good outcomes for customers and engender trust. No issue is taken here on the good work many of the banks are doing in this space. The conduct costs research was never intended to be a means by which to bluntly expose a bank’s conduct costs. Rather, it was to identify a proxy indicator of culture. CCP Research Foundation readily accepts the limitations of this metric. It would further accept that there are many initiatives, controls and/or mitigants that, if properly implemented, would act to promote good behaviour and outcomes for customers; as opposed to shining a light on misconduct post facto. The indirect effect of the capture (and publication) of a firm’s (and/or its peer’s) conduct costs on behaviour is clearly subordinate to such a priori measures. Aside from the lack of guidance and substantive discussion on how to effectively measure and manage common grey area conduct risk, the fact that the regulator is highlighting the culture issue again must, on its face, be applauded. Importantly, any criticisms voiced in this post are my personal views alone.

Court of Appeal Opens the Door to LIBOR and Benchmark Misrepresentation Claims

Property Alliance Group Ltd v The Royal Bank of Scotland Plc [2018] EWCA Civ 355 (02 March 2018)

Infamously, the London Inter-bank Offered Rate (LIBOR) used to be a code word for corruption in the world of finance. In more ways than one, it is still a dirty word from the point of view of ethics. However, even now, despite planning to phase it out by 2021 and replacing it with a proxy, the FCA calls LIBOR a “systemically important benchmark”. Property Alliance Group (PAG) appealed Asplin J’s decision to dismiss its claims against the Royal Bank of Scotland (RBS) arising out of interest rate swap agreements. RBS advanced funds to PAG at interest rates referenced to LIBOR, which was published relying upon submissions from panels of banks on borrowing rates. These proceedings arose out of four swaps that RBS sold to PAG between 2004 and the spring of 2008. The first swap had a trade date of 6 October 2004 and a notional amount of £10 million. The second swap had a trade date of 25 September 2007 and a notional amount of £15 million for 4 years and then £30 million for a further six years. The third swap had a trade date of 14 January 2008 and a notional amount of £20 million. The fourth swap had a trade date of 16 April 2008 and a notional amount of £15 million. The global financial crisis of 2007-2008 trigged a fall in interest rates. All the swaps were tied to 3 month GBP LIBOR which plummeted and stayed low. The upshot was that the rates of interest that PAG was paying under the swaps far exceeded what it was receiving under them.

One consequence of the prolonged period of unusually low interest rates was that the swaps had a very large negative market-to-market value (MTM) from PAG’s point of view. The break cost incurred by PAG in 2011 was correspondingly substantial. PAG issued proceedings in 2013 seeking relief by way of rescission of the swaps and/or damages. The claims were divided into three categories: “the swaps claims”, which involved allegations of misrepresentation, misstatement and breach of contract on the part of RBS in connection with its proposal and sale of the swaps to PAG; “the LIBOR claims” which rested on RBS’s knowledge of and participation in manipulation of LIBOR rates; and “the GRG claims” by which PAG complained of breaches of contract arising out of its transfer to, and subsequent management within the controversial Global Restructuring Group to which RBS transferred its relationship with PAG in 2010. Asplin J dismissed the claims in their entirety. However, despite dismissing the onward appeal, light of the circumstances Sir Terence Etherton MR, Longmore and Newey LJJ were satisfied that RBS did make some representation to the effect that RBS itself was not manipulating and did not intend to manipulate LIBOR.

Andrew Bailey on the Death of LIBOR

The ailing LIBOR benchmark, underpinning $500-$800 trillion worth of financial contracts, has been in a state of malaise for many years. Despite the efforts of regulators to revive the sick scandal-ridden benchmark, which suffered from a series of problems related to cheating and misreporting, it is unsurprising that its slow death will finally come in about four years’ time. As the Chief Executive of the FCA Andrew Bailey recently explained the funeral is set for 2021. But some clearly want LIBOR to live longer. Bailey called LIBOR “a public good” but questioned its current usefulness. Among other things, LIBOR related misconduct resulted in civil claims and fines of £9 billion. And, of course, in the criminal context it resulted in “clustered criminality” of which convicted LIBOR rigger Tom Hayes is a prime example. Clustered criminality, which only reflects a very small part of the ills affecting financial services, is when there “is at least strong suspicion that a crime has been committed and although the culprits may not be immediately clear it seems likely that more than one person was involved.” A succinct account of bankers lying, cheating and colluding to rig LIBOR is found in The Fix where Liam Vaughan and Gavin Finch expose the ills gripping the financial world. Hayes, who operated as “Tommy Chocolate” in the midst of the financial crisis, worked in a culture where “your performance metric” is all about “the edge” and making “a bit more money” because that is “how you are judged”.

In The Spider Network, David Enrich tells the “wild story” of Hayes – who he dubs “a maths genius” – and the backstabbing banking mafia which operated a thoroughly crooked financial system. Breaking the silence in an exclusive interview with The Sunday Times, Hayes’s wife Sarah Tighe vowed to “never stop fighting for my autistic husband, the LIBOR fall guy”. Hayes, who achieved notoriety by miraculously dodging extradition to the US, was jailed for 14 years for fraud but his sentence was reduced to 11 years. Tighe is fighting for her husband’s release and said that she “went apeshit” when officials tried to seize her assets as well. Her morale will undoubtedly be strengthened by the news that former Rabobank traders Anthony Allen and Anthony Conti, who are both British and were convicted at first instance for rigging LIBOR, have had their convictions overturned by the US Court of Appeals for the Second Circuit in New York which found that constitutional rights against self-incrimination had been breached. Tom and Sarah will probably also find solace in the fact that the cycle of cheating was so extreme that even the Bank of England is now implicated in LIBOR manipulation.

LIBOR Roundup: Fraud, Misrepresentation and New Directions in Civil Proceedings

ICE Benchmark Administration, which took over LIBOR from the BBA in 2014, has published a roadmap for LIBOR and banks will no longer be able to manipulate the interbank rate once a new system comes into place this summer connecting the IBA’s computers to banks’ trading systems. “We built new systems to do the surveillance which run about 4m calculations every day, looking for collusion, or aberrant behaviour, or possible manipulation,” explained the IBA’s president Finbarr Hutcheson. He expressed confidence that traders will no longer be able to lie to improve their trading positions and said that anomalies would be investigated and reported to the FCA. The banks have paid billions in fines in relation to the benchmark’s manipulation. The Wheatley Review 2012 engineered and guided LIBOR’s transformation because the distorted benchmark, underpinning more than US$350 trillion in outstanding contracts, was “not fit for purpose”. But of course, the review’s author Martin Wheatley was ousted from office because of his overt aggressiveness, or his “shoot first” and “ask questions later” policy for bad banks. Under IBA oversight, daily LIBOR rates will be rooted in market transactions “to the greatest possible extent” by using a “waterfall” system devised to begin with transactions but relies on human input in circumstances when trading volumes decline.

IBA is extremely confident that the move will bring rectitude to the scandal ridden financial sector. Hutcheson said that coupled with the earlier changes, the roadmap will ultimately make LIBOR “one of the world’s most trusted, scrutinised and robust financial benchmarks.” Insofar as benchmark rigging from the old days is concerned, after the settlement (2014) in the series of reported judgments in the Graiseley Properties case, new claims have been brought and a series of fresh judgments were published in litigation arising out of disputes between the Property Alliance Group – a property developer with a portfolio worth about £200 million – and the Royal Bank of Scotland. RBS has been in the spotlight recently because of the fact that it has failed to generate profit for eight successive years and that its losses since the global financial crisis 2008 have exceeded £50 billion which is more than the £45 billion of taxpayers’ money used to bail out the ailing institution.

Benchmark Manipulation and Corporate Crime: Insights on Financial Misconduct

In the second innings things were different. The reverse swinging old ball meant that the Serious Fraud Office’s openers came back to the pavilion with a duck and those charged with misconduct and put in the dock began to eye up the opportunity of scoring a hat trick. Coupled with the reduction in Hayes’s sentence by the Court of Appeal (Lord Thomas of Cwmgiedd CJ, Sir Brian Leveson PQBD and Gloster LJ, see here) on the ground that he was not in a managerial position and suffered from autism, the fact that Darrell Read, Danny Wilkinson and Colin Goodman, Noel Cryan, Jim Gilmour and Terry Farr were found not guilty of LIBOR manipulation casts doubt over future successful prosecutions in benchmark rigging cases. Hamblen J directed the jury to convict the brokers if they had played a “significant” role in helping him rig LIBOR. Apparently they had not. The Court of Appeal’s refusal to grant Hayes permission to appeal to the Supreme Court may provide limited comfort to the SFO but the acquittal of the above brokers charged in the second “sham” LIBOR trial has reversed the momentum gained by the authorities. The brokers’ exoneration exposes the SFO to the accusation that it has been wildly swinging a sledgehammer to smash a nut. So, having tasted blood after Tom Hayes’s conviction, taking a gung-ho approach to weeding out the City’s “bad apples” seems to have backfired because the clever brokers had simply let Hayes believe whatever he wanted.

According to the brokers, the SFO “didn’t investigate it properly and didn’t listen”. Despite big increases to its funding, claims that the SFO’s director David Green QC has overseen a “string of successes” and that the extension of his contract for two years is a “boon” for justice are proving to be totally without merit. These days it is the SFO which is in the dock and Tom Hayes’s tormented father Nick Hayes used the opportunity to defend his son and said: “Today Tom Hayes stands tall. He refused to testify versus the LIBOR brokers and paid the price … I’m proud of him.” Of course, measured against such poor performance, the fact that the embattled agency wants a top-up of £21.5 million in emergency funds for “blockbuster” probes to bolster its dwindling fortunes amounts to expecting rewards for failure; it is completely unjustified.

EURIBOR Manipulation: SFO Charges First Individuals

George Osborne recently compared bad bankers to shoplifters and Mark Carney said that nobody at the Bank of England (BoE) “will be hugging a banker” – despite the crack down some “bad apples” remain. Two days later, on 13 November 2015, the Serious Fraud Office (SFO) issued the first criminal proceedings against 10 individuals accused of manipulating the Euro Interbank Offered Rate (EURIBOR). Deutsche Bank employees Christian Bittar, Achim Kraemer, Andreas Hauschild, Joerg Vogt, Ardalan Gharagozlou, Kai-Uwe Kappauf and Barclays employees Colin Bermingham, Carlo Palombo, Philippe Moryoussef and Sisse Bohart have all been charged with conspiracy to defraud in connection with the SFO’s ongoing investigation – announced on 6 July 2012 – into the manipulation of EURIBOR, the daily reference rate, published by the European Banking Federation, based on the averaged interest rates at which Eurozone banks offer to lend unsecured funds to other banks in the interbank market, or euro wholesale money market. According to the SFO, criminal proceedings will be issued against other individuals in due course and the above defendants will make their first appearance at Westminster Magistrates’ Court on 11 January 2016. On the other side of the Atlantic, in the first US LIBOR trial, on 5 November 2015 a New York jury found former Rabobank employees Anthony Allen (global head of liquidity and finance) and Anthony Conti (a senior trader) guilty of rigging LIBOR and the pair face lengthy jail sentences.

Unlike Tom Hayes and Nav Sarao, Allen and Conti waived extradition to fight charges of conspiracy and wire fraud in America and they maintain their innocence despite having “left a paper trail a mile long”. Both men are British citizens and American prosecutors are adamant that the guilty verdicts are founded on “rock solid evidence”. Rabobank paid £662 million in LIBOR penalties in 2013 of which the Financial Conduct Authority (FCA) imposed £105 million. Both men were convicted in a district court in Manhattan on every count of conspiracy and wire fraud they faced and the outcome is a major triumph for American law enforcement officials in the US Department of Justice which brought charges against the Britons a year after the Dutch bank managed to achieve the $1 billion/£662 million compromise in October 2013 in relation to pending US and European probes.

Former Rogue UBS Trader Kweku Adoboli Loses Deportation Appeal

In comparison to Tom Hayes (who got 14 years’ imprisonment and is appealing his sentence and conviction) and others being prosecuted for benchmark rigging, it is arguably quite scandalous that UBS rogue trader Kweku Adoboli (who was convicted of two counts of fraud and sentenced to seven years’ imprisonment) was released from prison after spending just a bit over three years behind bars for losing $2.5 billion in unauthorised trading. Ghana-born Adoboli – who travelled the world as a child – is said to be the son of a United Nations official/diplomat. Because of his misconduct, the Financial Conduct Authority (FCA) understandably wishes to ban Adoboli, who reckoned he had a “magic touch”, from being a regulated person in financial services. But now it has emerged that Adoboli was notified of his liability to deportation and has lost his appeal in relation to the decision to deport him from the UK. The 35-year old Ghanaian national, who has resided in the UK for 23 years but never got around to obtaining British nationality, was released from prison in June 2015 and reportedly found the immigration tribunal’s decision upholding his deportation to be “heartbreaking”. His rogue trading wiped off £2.7 billion ($4.5 billion) from UBS’s share price.

The media suggests that the former public school head boy and University of Nottingham graduate – holding a degree in e-commerce and digital business studies – plans to appeal the tribunal’s decision. It has been reported that the home office only seeks to deport individuals whose sentence is longer than four years (Immigration Rules, Part 13, Deportation and Article 8, para 398(a)) unless they are able to demonstrate otherwise. (A sentence of four years’ imprisonment or more means the person is a serious criminal and “very compelling circumstances” is an extremely high threshold. As a general principle, the greater the public interest in deporting the foreign criminal, the more compelling the foreign criminal’s circumstances must be in order to outweigh it.) However, under para 398(b) the deportation of a person from the UK is conducive to the public good and in the public interest where they have been convicted of an offence for which they have been sentenced to a period of imprisonment of less than four years but at least 12 months. It is common knowledge that anyone who has been convicted of an offence exceeding 12 months’ imprisonment is caught by “automatic deportation” because after the foreign national prisoners crisis the government legislated in

The LIBOR Trial: Episode Two

The SFO lost this case: see here, original post continues. Only recently former rogue UBS trader Tom Hayes, who accused the Swiss lender of distributing a manual on rigging LIBOR, became the first person ever to be convicted of benchmark rigging. He got 14 years’ imprisonment for eight counts of fraud and is appealing his conviction and sentence. However, episode two of the LIBOR trial is underway in London this week and a number of brokers thought to be acting in cahoots with Hayes are facing a jury in Southwark crown court for manipulating the interbank rate. These proceedings constitute a continuation of the long promised clean up (being overseen by the Serious Fraud Office) of rampant cheating in the banking and financial services industry that erupted in the aftermath of the global financial crisis. The sequel proceedings involve a batch of allegedly crooked individuals, namely Darrell Read (50), Colin Goodman (53), Danny Wilkinson (48) of ICAP (“a leading markets operator and provider of post trade risk mitigation and information services”); Terry Farr (44) and James Gilmour (50), formerly of RP Martin; and Noel Cryan (49, of Tullet Prebon). Their criminal trial began today and is expected to last 12 to 14 weeks and is likely to end early in the new year. All six men deny the charges and have elected to plead not guilty.

The new/emergent point in these cases is the part played by brokers, and not traders and submitters, in LIBOR manipulation. The half a dozen individuals identified above stand accused of conspiring with Hayes to rig LIBOR by suggesting numbers which were falsified and misleading. Darrell Read and Colin Goodman are said to have conspired with Brent Davies (also of ICAP) and Hayes. Terry Farr and James Gilmour are said to have conspired with Luke Madden of HSBC and Paul Robson of Rabobank to rig LIBOR. Farr also faces charges for conspiring with Hayes during his time at Citibank (which ultimately reported him over his cheating ways). Noel Cryan is accused of conspiring with UBS traders. Mr Justice Hamblen, a highly accomplished and respected judicial figure, will hear the case and it is being prosecuted by Mukul Chawla QC who saw to it that no loose boards were left dangling from Hayes’s coffin when he went down. Opening the case for the prosecution, Mukul Chawla QC argued that all six defendants conspired with Hayes and others and that

Tom Hayes: Trial By Fire

As ever, the world of finance is abuzz with sizzling news. Most of it, like the judgment in Plevin [2014] UKSC 61, makes pretty grim reading for banks. Similarly, forex fixing claims worth billions are brewing in London – a colossal currency market – because of last week’s $2 billion payout in New York by household names such as Barclays, HSBC and RBS and numerous others: indeed, the settlement of class action litigation with investors, arising out of the rigging of WM/Reuters 4pm London Fix, has been tipped as opening the floodgates. This comes off the heels of May 2015’s foreign exchange (forex or FX) rigging penalties of $5.6 billion: watch excellent video on how the “Cartel” and “Coiled Cobra” rigged the marketplace. Such events leave little room for doubt that the LIBOR scandal was just the tip of the iceberg because the rigging of the $5.3 trillion-a-day forex markets completely dwarfs the total $500-$800 trillion value of financial contracts underpinned by LIBOR. Citigroup, JPMorgan Chase & Co, Barclays and RBS all pleaded guilty in May in forex related criminal cases. In other news, things are looking dreadful for those charged by the Serious Fraud Office (SFO). In the first LIBOR trial, Tom Hayes, an obscure yen derivatives trader in UBS and Citigroup became the world’s first individual to be tried and convicted for benchmark rigging. He got 14 years’ imprisonment for his crimes. Against this nightmare sentence, his trial has set a chilling precedent for the 12 others in his shoes who are awaiting trial.

Hayes contended that he was operating in a “grey area” where there were “no rules” and that he had no compliance training, but this did nothing to help him. His predicament gives promise to the maxim that “the age of irresponsibility is over.” In the case against him, Hayes was described as a “ringmaster” whose avarice knew no bounds. The archetypical Foucauldian fiend, he stood accused of using corruption and accepted making “concerted efforts to influence LIBOR” but argued he “was operating within a system”. Discussing the dilemma’s associated with punishment, in Discipline and Punish: The Birth of the Prison Foucault concludes that the offender is “worse than an enemy” and that transgressing the boundaries set by society makes him “nothing less than a traitor, a monster.” The outcome of this pivotal case will serve as a yardstick for future prosecutions against benchmark manipulators and fraudsters. The system had to make an example of Hayes to create a deterrent effect, others will think twice before following in his wretched footsteps.