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Authorities Fine Icap Over Libor, Charge Former Employees

Authorities both sides of the
Atlantic have slapped Icap Europe
with a fine relating to staff
activities at the interdealer broker during
the Libor fixing scandal.

The Commodity Futures Trading
Commission (CFTC) announced it was
bringing and settling charges of
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.

The CFTC’s Order claims that for more
than four years, from at least October
2006 through at least January 2011, Icap
brokers on its 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.

“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 
employed at UBS Securities Japan and
later at another bank, in his relentless
attempts to manipulate yen Libor to
benefit his derivatives trading positions
tied to this benchmark,” CFTC says. “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,” says
David Meister, the CFTC’s director of
enforcement. “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.”

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, CFTC claims.

The Order says 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, says CFTC.
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.

According to the Order, the Icap brokers
referred to the panel bank submitters as
“sheep” when they copied the yen cash
broker’s suggested Libors, the CFTC
states. In fact, the Order says 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 allegedly disseminated the false
suggested Libors, demanded
compensation from the yen derivatives
desk for his “Libor services” or “no more
Mr Libor” the CFTC says, adding this
grew from dinners and champagne, to
additional commission-generating trades,
to “kick backs” totaling $72,000.

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

In addition to imposing a $65 million
penalty, the CFTC Order requires Icap
and Icap plc 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; as well as document
and retain basis for market publications. It
further says the companies should 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. Further it
should review certain electronic and audio
communications and implement auditing,
monitoring and training measures; report
to the CFTC on its compliance with the
terms of the Order; and continue to co-
operate with the CFTC.

The CFTC Order also recognises the
co-operation of Icap Europe 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 and imposed a
penalty of GBP 14 million.

Following the announcement of the fines,
the US Department of Justice charged
former Icap derivatives broker Darrell
Read, his supervisor Daniel Wilkinson, and
cash broker Colin Goodman with
conspiracy to commit wire fraud and two
counts of wire fraud – offences carrying
sentences of up to 30 years. 

Paul Gogliormella

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