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False Manipulation of Interest Rates

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CFTC Orders Barclays to pay $200 Million Penalty for Attempted Manipulation of and False Reporting concerning LIBOR and Euribor Benchmark Interest Rates

 

The Order finds that Barclays attempted to manipulate interest rates and made related false reports to benefit its derivatives trading positions

The Order also finds that Barclays made false LIBOR reports at the direction of members of senior management to protect its reputation during the global financial crisis

 

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) issued an Order today filing and settling charges against Barclays PLC, Barclays Bank PLC (Barclays Bank) and Barclays Capital Inc. (Barclays Capital) (collectively Barclays or the Bank). The Order finds that Barclays attempted to manipulate and made false reports concerning two global benchmark interest rates, LIBOR and Euribor, on numerous occasions and sometimes on a daily basis over a four-year period, commencing as early as 2005.

 

According to the Order, Barclays, through its traders and employees responsible for determining the Bank’s LIBOR and Euribor submissions (submitters), attempted to manipulate and made false reports concerning both benchmark interest rates to benefit the Bank’s derivatives trading positions by either increasing its profits or minimizing its losses. This conduct occurred regularly and was pervasive. In addition, the attempts to manipulate included Barclays’ traders asking other banks to assist in manipulating Euribor, as well as Barclays aiding attempts by other banks to manipulate U.S. Dollar LIBOR and Euribor.

 

The Order also finds that throughout the global financial crisis in late August 2007 through early 2009, as a result of instructions from Barclays’ senior management, the Bank routinely made artificially low LIBOR submissions to protect Barclays’ reputation from negative market and media perceptions concerning Barclays’ financial condition.

 

The CFTC Order requires Barclays to pay a $200 million civil monetary penalty, cease and desist from further violations as charged, and take specified steps, such as making the determinations of benchmark submissions transaction-focused (as set forth in the Order), to ensure the integrity and reliability of its LIBOR and Euribor submissions and improve related internal controls.

 

“The American public and our markets rely upon the integrity of benchmark interest rates like LIBOR and Euribor because they form the basis for hundreds of trillions of dollars of transactions and affect nearly every corner of the global economy,” said David Meister, the CFTC’s Director of Enforcement. “Banks that contribute information to those benchmarks must do so honestly. When a bank acts in its own self-interest by attempting to manipulate these rates for profit, or by submitting false reports that result from senior management orders to lower submissions to guard the bank’s reputation, the integrity of benchmark interest rates is undermined. The CFTC launched this investigation to protect the markets and the public from such illegal conduct, and today’s action demonstrates that we will bring the full force of our authority to bear as we carry out that mission.”

 

LIBOR and Euribor

 

LIBOR – the London Interbank Offered Rate – is among the most important benchmark interest rates in the world’s economy, and is a key rate in the United States. LIBOR is based on rate submissions from a relatively small and select panel of major banks, including Barclays, and is calculated and published daily for several different currencies by the British Banker’s Association (BBA). Each panel bank’s submission is also made public, and the market can therefore see each bank’s independent assessment of its own borrowing costs. LIBOR is supposed to reflect the cost of borrowing unsecured funds in the London interbank market.

 

Euribor, which is calculated in a similar fashion by the European Banking Federation (EBF), is another globally important rate that measures the cost of borrowing in the Economic and Monetary Union of the European Union.

 

LIBOR impacts enormous volumes of swaps and futures contracts, commercial and personal consumer loans, home mortgages and other transactions. For example, U.S. Dollar LIBOR is the basis for the settlement of the three-month Eurodollar futures contract traded on the Chicago Mercantile Exchange (CME), which had a traded volume in 2011 with a notional value exceeding $564 trillion. In addition, according to the BBA, swaps with a notional value of approximately $350 trillion and loans amounting to $10 trillion are indexed to LIBOR. Euribor is also used internationally in derivatives contracts. In 2011, over-the-counter interest rate derivatives referenced to Euro rates had a notional value in excess of $220 trillion, according to the Bank for International Settlements. LIBOR and Euribor are relied upon by countless large and small businesses and individuals who trust that the rates are derived from candid and reliable submissions made by each of the banks on the panels.

 

Barclays’ Unlawful Conduct to Benefit Derivatives Trading Positions

 

As the Order shows, Barclays, in pursuit of its own self-interest, disregarded the fundamental principle that LIBOR and Euribor are supposed to reflect the costs of borrowing funds in certain markets. Barclays’ traders located at least in New York, London and Tokyo asked Barclays’ submitters to submit particular rates to benefit their derivatives trading positions, such as swaps or futures positions, which were priced on LIBOR and Euribor. Barclays’ traders made these unlawful requests routinely, and sometimes daily, from at least mid-2005 through at least the fall of 2007, and sporadically thereafter into 2009. The Order relates that, for example, one trader stated in an email to a submitter: “We have another big fixing tom[orrow] and with the market move I was hoping we could set [certain] Libors as high as possible.”

 

In addition, certain Barclays Euro swaps traders, led at the time by a senior trader, coordinated with and aided and abetted traders at other banks in each other’s attempts to manipulate Euribor, even scheming to impact Euribor on key standardized dates when many derivatives contracts are settled or reset.

 

The traders’ requests were frequently accepted by Barclays’ submitters, who emailed responses such as “always happy to help,” “for you, anything,” or “Done…for you big boy,” resulting in false submissions by Barclays to the BBA and EBF. The traders and submitters also engaged in similar conduct on fewer occasions with respect to Yen and Sterling LIBOR.

 

Barclays’ Unlawful Conduct at the Direction of Senior Management

 

The CFTC Order also finds that Barclays, acting at the direction of senior management, engaged in other serious unlawful conduct concerning LIBOR. In late 2007, Barclays was the subject of negative press reports raising questions such as, “So what the hell is happening at Barclays and its Barclays Capital securities unit that is prompting its peers to charge it premium interest in the money market?” Such negative media speculation caused significant concern within Barclays and was discussed among high levels of management within Barclays Bank. As a result, certain senior managers within Barclays instructed the U.S. Dollar LIBOR submitters and their supervisor to lower Barclays’ LIBOR submissions to be closer to the rates submitted by other banks and not so high as to attract media attention.

 

According to the Order, senior managers even coined the phrase “head above the parapet” to describe high LIBOR submissions relative to other banks. Barclays’ LIBOR submitters were told not to submit at levels where Barclays was “sticking its head above the parapet.” The directive was intended to fend off negative public perceptions about Barclays’ financial condition arising from its high LIBOR submissions relative to the submissions of other panel banks, which Barclays believed were too low given the market conditions.

 

Despite concerns being raised by the submitters that Barclays and other banks were, for example, “being dishonest by definition” and that they were submitting “patently false” rates, the submitters followed the directive and submitted artificially lower rates. The senior management directive for low U.S. Dollar LIBOR submissions occurred on a regular basis during the global financial crisis from August 2007 through early 2009, and, at limited times, for Yen and Sterling LIBOR during the same period. As the U.S. Dollar senior submitter said in October 2008 to his supervisor at the time, “following on from my conversation with you I will reluctantly, gradually and artificially get my libors in line with the rest of the contributors as requested. I disagree with this approach as you are well aware. I will be contributing rates which are nowhere near the clearing rates for unsecured cash and therefore will not be posting honest prices.”

 

Barclays’ Obligations to Ensure Integrity and Reliability of Benchmark Interest Rates

 

In addition to the $200 million penalty, the CFTC Order requires Barclays to implement measures to ensure that its submissions are transaction-focused, based upon a rigorous and honest assessment of information and not influenced by conflicts of interest. See pages 31-44 of the CFTC’s Order. Among other things, the Order requires Barclays to:

 

Make its submissions based on certain specified factors, with Barclays’ transactions being given the greatest weight, subject to certain specified adjustments and considerations;

Implement firewalls to prevent improper communications including between traders and submitters;

Prepare and retain certain documents concerning submissions, and retain relevant communications;

Implement auditing, monitoring and training measures concerning its submissions and related processes;

Make regular reports to the CFTC concerning compliance with the terms of the Order;

Use best efforts to encourage the development of rigorous standards for benchmark interest rates; and

Continue to cooperate with the CFTC.

 

* * * *

 

The Order recognizes Barclays’ significant cooperation with the CFTC during the investigation of this matter.

 

In a related matter, as part of an agreement with the Fraud Section of the U.S. Justice Department’s Criminal Division, Barclays agreed to pay a $160 million penalty and to continue to cooperate with the Department. Furthermore, the United Kingdom’s Financial Services Authority (FSA) issued a Final Notice regarding its enforcement action against Barclays Bank PLC, and has imposed a penalty of £59.5 million against the Bank.

 

The CFTC thanks the FSA, the U.S. Department of Justice, the Washington Field Office of the Federal Bureau of Investigation and the U.S. Securities and Exchange Commission for their assistance in the CFTC’s investigation.

 

CFTC Division of Enforcement staff members responsible for this case are Anne M. Termine, Stephen T. Tsai, Maura M. Viehmeyer, Brian G. Mulherin, Gretchen L. Lowe and Vincent A. McGonagle, with assistance from Philip P. Tumminio, Rishi K. Gupta, Russell Battaglia, Jeremy Cusimano, Elizabeth Padgett, Terry Mayo, Jason T. Wright, Aimée Latimer-Zayets, Timothy M. Kirby, Jonathan K. Huth, Susan A. Berkowitz and staff from the Division of Market Oversight and Office of the Chief Economist.

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Attached are materials related to the actions of the Federal Reserve Bank of New York (“New York Fed”) in connection with the Barclays-LIBOR matter. These include documents requested by Chairman Neugebauer of the U.S. House of Representatives, Committee on Financial Services, Subcommittee on Oversight and Investigations. Chairman Neugebauer requested all transcripts that relate to communications with Barclays regarding the setting of interbank offered rates from August 2007 to November 2009. Please note that the transcript of conversations between the New York Fed and Barclays was provided by Barclays pursuant to recent regulatory actions, and the New York Fed cannot attest to the accuracy of these records. The packet also includes additional materials that document our efforts in 2008 to highlight problems with LIBOR and press for reform. We will continue to review our records and actions and will provide updated information as warranted.

 

An important and longstanding role of the New York Fed Markets Group is to monitor a wide range of markets for the purpose of understanding and reporting on market conditions and market functioning. Each day, analysts gather information on a nearly continuous basis by speaking with market participants and asking both general and specific questions about prevailing market conditions, the magnitude of movements in prices or the volume of activity, or any other issues in the markets. These analysts also review large amounts of market commentary they receive via individual and mass-distribution emails, and review a wide variety of data feeds.

 

Following the onset of the financial crisis in 2007, markets monitoring played a critical role by identifying the nature and location of rapidly mutating financial stress. Markets Group analysts engaged with market participants – including staff at Barclays - to better understand the nature of market stress. In the course of these exchanges, market participants reported dysfunction in the form of illiquidity and anomalous pricing across many different markets.

 

Among the information gathered through markets monitoring in the fall of 2007 and early 2008, were indications of problems with the accuracy of LIBOR reporting. LIBOR is a benchmark interest rate set in London by the British Bankers Association (“BBA”) under the broad jurisdiction of the UK authorities, based on submissions by a panel of mostly non-US banks. The LIBOR panel banks self-report the rate at which they would be able to borrow funds in the interbank money market for various periods of time. As the interbank lending markets dried up these estimates became increasingly hypothetical.

 

Suggestions that some banks could be underreporting their LIBOR in order to avoid appearing weak were present in anecdotal reports and mass-distribution emails, including from Barclays, as well as in a December 2007 phone call with Barclays noting that reported “Libors” appeared unrealistically low.

 

As market strains intensified in early 2008, to better understand the nature and extent of the potential problems with LIBOR, analysts in the Markets Group gathered additional and more in-depth information. As part of this broad effort, on April 11, an analyst from the Markets Group queried a Barclays employee in detail as to the extent of problems with LIBOR reporting.

 

The Barclays employee explained that Barclays was underreporting its rate to avoid the stigma associated with being an outlier with respect to its LIBOR submissions, relative to other participating banks. The Barclays employee also stated that in his opinion other participating banks were also under-reporting their LIBOR submissions. The Barclays employee did not state that his bank had been involved in manipulating the rate for its own trading advantage. Immediately following this call, the analyst notified senior management in the Markets Group that a contact at Barclays had stated that underreporting of LIBOR was prevalent in the market, and had occurred at Barclays.

 

That same day - April 11, 2008 - analysts in the Markets Group reported on the questions surrounding the accuracy of the BBA’s LIBOR fixing rate in their regular weekly briefing note. The briefing note cited reports from contacts at LIBOR submitting banks that banks were underreporting borrowing rates to avoid signaling weakness. In accordance with standard practice for briefing notes produced by the Markets Group, this report was circulated to senior officials at the New York Fed, the Federal Reserve Board of Governors, other Federal Reserve Banks, and U.S. Department of Treasury. The briefing note is included in this packet.

 

Five days later, the first media report on problems with LIBOR emerged. From this point onwards the notion that banks were underreporting LIBOR in order to avoid signaling weakness was widely discussed in the press and in market commentary.

 

In late April and into May 2008, New York Fed officials met to determine what steps might be taken to address the problems with LIBOR. The New York Fed also acted to brief other US agencies. On May 1 Tim Geithner, then President of the New York Fed, raised the subject at a meeting of the President’s Working Group on Financial Markets (“PWG”), a body that comprised the heads of the principal regulatory agencies in the US, chaired by Treasury. On May 6 New York Fed staff briefed senior officials from the U.S Treasury in detail.

 

On May 20 the Markets Group sent a further report on problems with LIBOR to the broad set of senior officials who receive its regular analysis. The report is included in this packet. On June 5, New York Fed officials also briefed an interagency working group comprised of staff from the PWG. The presentations given to Treasury and to the PWG staff are included in this packet.

 

New York Fed officials also met with representatives from the British Bankers Association to express their concerns and establish in greater depth the flaws in the LIBOR-setting process. The New York Fed analysis culminated in a set of recommendations to reform LIBOR, which was finalized in late May. On June 1, 2008, Mr. Geithner emailed Mervyn King, the Governor of the Bank of England, a report, entitled “Recommendations for Enhancing the Credibility of LIBOR.”

 

Among the recommendations were specific proposals to improve the integrity and transparency of the rate-setting process, including the suggestion that LIBOR submissions should be subject to internal and external audit of the accuracy of the reporting by banks. A copy of this email and the memorandum is included in this packet.

 

Shortly afterwards, Mr. King confirmed to Mr. Geithner that he had transmitted the New York Fed recommendations to the British Bankers Association soon afterwards. After putting forward recommendations for LIBOR reform to the UK authorities, the New York Fed continued to monitor for problems related to LIBOR.

 

As is clear from the work culminating in the report to Mr. King of the Bank of England, the New York Fed helped to identify problems related to LIBOR and press the relevant authorities in the UK to reform this London-based rate.

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All files in PDF format

 

Explanatory Note

 

April 11, 2008: MarketSOURCE Weekly Market Review

 

May 6, 2008: Slide Deck of Presentation to U.S. Treasury, "Recent Developments in Short-Term Funding Markets"

 

May 20, 2008: MarketSOURCE report “Recent Concerns Regarding LIBOR’s Credibility”

 

June 1, 2008: Timothy F. Geithner e-mail to Mervyn King, copying Paul Tucker, with attached “Recommendations for Enhancing the Credibility of LIBOR”

 

June 3, 2008: Mervyn King e-mail to Timothy F. Geithner

 

June 5, 2008: Slide Deck of Presentation to the Interagency Financial Markets Group Meeting "Market Concerns Regarding LIBOR"

Materials provided by Barclays

 

Redacted by Barclays

 

All files in PDF format

 

August 28, 2007: mass distribution e-mails:

  • 8:01 a.m. mass-distribution e-mail from Barclays.
  • 11:27 a.m. “reply all” response to the original e-mail from Barclays.

September 3, 2007: mass distribution e-mail from Barclays

 

September 26, 2007: mass distribution e-mail Barclays

 

October 3, 2007: e-mail from Barclays

 

November 29, 2007: mass distribution e-mail from Barclays

 

December 17, 2007: transcript of phone call between Barclays and New York Fed Markets Group analyst

 

March 27, 2008: mass distribution e-mail from Barclays

 

April 11, 2008: transcript of phone call between Barclays employee and analyst in the Markets Group of the New York Fed

 

October 10, 2008: transcript of phone call between Barclays employee and analyst in the Markets Group of the New York Fed

 

October 24, 2008: transcript of phone call between Barclays employee and analyst in the Markets Group of the New York Fed

 

October 27, 2008: transcript of phone call between Barclays employee and analyst in the Markets Group of the New York Fed

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Walmart Statement Opposing the Proposed Interchange Fee Settlement

 

Walmart, along with a growing number of consumer groups and merchants, is disappointed in the proposed credit card interchange fee settlement. The proposed settlement would not structurally change the broken market or prohibit credit card networks from continually increasing hidden swipe fees, which already cost consumers tens of billions of dollars each year. The proposed settlement would require merchants to broadly waive their rights to take action against the credit card networks for detrimental conduct or acts. We believe the proposed settlement would also constrain emerging payments innovation. As Walmart continues to seek reform that will provide transparency and true competition among financial institutions, we encourage all merchants to put consumers first and reject the settlement.”

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