No more Mr Libor | FT Alphaville

No more Mr Libor

Derivatives Broker 1:

HI MATE,JUST HAD [Yen Desk Head] BACK ON RE LIBORS,HAD A LOT OF COMPLIANCE PRESSURE RECENTLY DUE TO THE CREDIT PROBLEMS, WE BOTH NEED TO BE A LITTLE MORE SUBTLE IN OUR “VIEWS” .. .IE’ I THINK THE FWDS ARE SUGGESTING THIS 6MOS LIBOR SHOULD BE LOWER …. ETC. MY E-MAILS ETC. NEED TO BE WORDED MORE CAREFULY

It was a cunning plan, except for the small flaw that it was rubbish. From the CFTC on Wednesday — details behind ICAP’s £55m settlement with UK and US regulators about allegations that brokers helped bank traders attempt to manipulate Yen Libor between October 2006 and January 2011. In Libor-fine terms, of course, £55m’s pretty piddling.

However the CFTC order includes plenty of emails, and so it’s another instalment in a by now familiar genre:

ICAP Yen brokers gloated over their influence on the Yen market and the Yen LIBOR fixings. They referred to panel banks as “copying” the Cash Broker’s Suggested LIBORs, and called them “sheep” because they followed wherever the Cash Broker led them (“[Cash Broker 1] sending out higher than he thinks so hopefuly the sheep will just copy”). Cash Broker 1 believed and boasted that a number of banks were copying his Yen LIBOR recommendations. Cash Broker 1 referred to himself and was called by others by such monikers as “Mr. LIBOR,” “Lord LIBOR,” “Lord Bailiff’ and “M’Lord.” At least Derivatives Broker 1 also believed Cash Broker 1 was successful in “moving the market” on a number of occasions…

And you simply get a sense of the power enjoyed by the brokers by virtue of their ability to provide market colour and information. Plus their interdependence with traders’ financial incentives. Here’s a taste of how they worked with a “Senior Yen Trader” who worked first at UBS before moving to another panel bank…

The Senior Yen Trader sought to capitalize on ICAP’s extensive network of contacts at the Yen LIBOR panel banks to achieve his manipulative goals. Because the Senior Yen Trader was a significant client of the ICAP Yen derivatives desk, and to ensure that the desk kept and increased its share of his business, including the commissions and bonuses he generated for ICAP, the ICAP Yen brokers readily acquiesced to his repeated demands for assistance in manipulating Yen LIBOR…

Almost all of the panel banks’ Yen LIBOR submitters received the cash broker’s Run Thru emails, and several relied on them in making their own rate submissions. However, during the relevant period, ICAP’s Yen cash broker often skewed his Suggested LIBORs to benefit the Senior Yen Trader, rather than provide an objective, unbiased assessment of this benchmark interest rate…

ICAP’s Yen derivatives desk maintained ICAP’s direct relationship with the Senior Yen Trader. They and the Senior Yen Trader ensured the ICAP cash broker’s unlawful assistance by providing various financial incentives, but the cash broker grew increasingly demanding. At one point, the ICAP Yen cash broker threatened the head of the Yen derivatives desk- “no more mr libor”- if he was not well-compensated for his services. As the cash broker’s demands grew, the “kick backs” (as the head of the Yen derivatives desk called it) paid to the cash broker for “LIBOR services” quickly escalated from free meals and champagne, to commissions specially generated by the Senior Yen Trader, to a quarterly payment of $9,000 (ultimately totaling $72,000).

It all reads a bit desperate, really.

Three former ICAP brokers also now face criminal charges in the US.