CFTC Orders ICAP To Pay $65 Million Penalty For Manipulating Yen LIBOR

Interdealer broker ICAP has been issued with a $65 million civil monetary penalty by the CFTC today for manipulation, false

The European division of interdealer broker ICAP has been charged by the US Commodity Futures Trading Commission (CFTC), with relation to a series of transgressions.

According to the case brought against ICAP Europe Ltd by the CFTC, the company engaged in manipulation, attempted manipulation, false reporting, and aiding and abetting derivatives traders’ manipulation and attempted manipulation, relating to the London Interbank Offered Rate (LIBOR) for yen.

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LIBOR is a critical benchmark interest rate used throughout the world as the basis for trillions of dollars of transactions. ICAP is a subsidiary of UK-based ICAP plc.

A Dim View

The CFTC has demonstrated its commitment to imposing penalties on financial institutions which seek to manipulate benchmarks, and earlier this year ordered the Japanese arm of British financial giant Royal Bank of Scotland, RBS Securities Japan, to pay a total of $325 million as a result of its manipulation of yen and Swiss franc LIBOR, in a similar vein to today’s charges against ICAP, bringing the sum total of penalties imposed by the CFTC for manipulation of benchmarks to $1.3 billion.

In this case brought against ICAP, the CFTC’s Order finds that for more than four years, from at least October 2006 through to January 2011, ICAP brokers’ of yen derivatives and cash desks, knowingly disseminated false and misleading information concerning yen borrowing rates to market participants, in attempts to manipulate, at times successfully, the official fixing of the daily yen LIBOR.

The cited ICAP brokers’, including one known as “Lord LIBOR” or “Mr. LIBOR,” did so to aid and abet their highly valued client, who was a senior yen derivatives trader (Senior Yen Trader), employed at UBS Securities Japan Co., Ltd (UBS) and later at another bank, in his relentless attempts to manipulate yen LIBOR to benefit his derivatives trading positions tied to this benchmark. On limited occasions, ICAP yen brokers engaged in this unlawful conduct to benefit other derivatives traders as well.

The Order requires ICAP, among other things, to pay a $65 million civil monetary penalty, and cease and desist from further violations as charged. Pursuant to the Order, ICAP and ICAP plc also agree to take specified steps to ensure the integrity and reliability of benchmark interest rate-related market information disseminated by ICAP, and certain other ICAP plc companies.

“ICAP and other interdealer brokers are expected to be honest middlemen,” stated David Meister, the CFTC’s Director of Enforcement in a public statement.

“Here, certain ICAP brokers were anything but honest. They repeatedly abused their trusted role when they infected the financial markets with false information to aid their top client’s manipulation of LIBOR. As should be clear from today’s action, any market participant who seeks to undermine the integrity of a global benchmark interest rate, must be held accountable,” concluded Mr. Meister.

Yen LIBOR is fixed daily, based on rates contributed by panel banks for yen LIBOR that are supposed to reflect each bank’s assessment of costs of borrowing unsecured funds in the London interbank market. ICAP, as an interdealer broker, intermediates cash and LIBOR-based derivatives transactions between banks and other institutions. As a service to clients and to solicit and maintain business, ICAP also provides banks with market insight, including projections of likely LIBOR fixings, which are implicitly represented as ICAP’s unbiased assessment of borrowing costs and market pricing based on objective, observable data, some of which was uniquely in ICAP’s possession.

According to the CFTC’s Order, the UBS Senior yen trader called on ICAP yen brokers more than 400 times for assistance in manipulating yen LIBOR. ICAP brokers often accommodated the requests by issuing, via a yen cash broker, group emails to panel banks and others containing “Suggested LIBORs” for yen LIBOR. But, rather than providing an honest and objective assessment of how yen LIBOR would fix, the Suggested LIBORs reflected the preferred rates that would benefit the senior yen trader.

The Order finds that almost all of the yen LIBOR panel banks received the Suggested LIBORs, and several relied on them in making their yen LIBOR submissions, particularly, during the financial crisis of 2007-2009. Even panel banks that tried to make truthful yen LIBOR submissions, may have passed on false or misleading submissions, because they used ICAP brokers’ purportedly unbiased Suggested LIBORs to inform their LIBOR submissions.

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Furthermore, the CFTC found that the ICAP brokers referred to the panel bank submitters as “sheep”, when they copied the yen cash broker’s Suggested LIBORS. Indeed, the Order finds that at least two banks’ submissions mirrored the Suggested LIBORs up to 90% of the time.

The Order further finds that the ICAP yen brokers provided these “LIBOR services” to keep the senior yen trader’s business, which accounted for as much as 20% of the yen derivatives desk’s revenue. “Mr. LIBOR,” the yen cash broker who disseminated the false Suggested LIBORs, demanded compensation from the yen derivatives’ desk for his “LIBOR services” or “no more Mr. LIBOR.” This grew from dinners and champagne, to additional commission-generating trades, to “kick backs” totalling $72,000.

Regulators Target LIBOR Manipulators

The Order further finds that this unlawful, manipulative conduct continued for more than four years, in part, because ICAP’s supervision, internal controls, policies and procedures were inadequate. For example, ICAP never audited the yen derivatives’ desk and left compliance oversight to the yen derivatives’ desk head, who was complicit in the misconduct.

The CFTC published that ICAP plc and ICAP must strengthen internal controls to ensure integrity and reliability of benchmark interest rate-related market information.

In addition to imposing a $65 million penalty, which yet again shows the US authorities’ tenacity when it comes to censuring firms engaging in this practice, compared to other jurisdictions such as Singapore, home to a large institutional and inter-bank FX industry, whose regulator caught 133 traders engaging in this practice, issuing them with warnings and disciplinary action, rather than handing down deterrents, such as multi-million dollar financial penalties.

As well as requiring ICAP to pay the penalty, the CFTC Order requires the company to implement and strengthen internal controls, policies and procedures governing benchmark interest rate-related market information that ICAP and certain ICAP plc companies send to market participants. Among other things, the Order requires ICAP and ICAP plc to:

• Base written benchmark interest rate-related predictions on certain factors

• Document and retain basis for market publications

• Require certain disclosures, including that certain market information reflects the opinions of the author, sources of information or data upon which opinion is based; and use of any models, correlated markets or related trading instruments

• Review certain electronic and audio communications

• Implement auditing, monitoring and training measures

• Report to the CFTC on its compliance with the terms of the Order

• Continue to cooperate with the CFTC

The CFTC Order also recognizes the cooperation of ICAP Europe Limited with the Division of Enforcement in its investigation.

In a related action, the United Kingdom Financial Conduct Authority (FCA) issued a final notice regarding its enforcement action against ICAP Europe Limited, and imposed a penalty of £14 million, the equivalent of approximately $22.4 million.

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