October 17 is going to be a big day for global USD money markets. It’s the deadline by which prime money market reforms must adjust to floating NAV models, leaving only those funds investing in government securities able to offer par value protection. The likes of Zoltan Pozsar at Credit Suisse are expecting banks to lose a significant whack of unsecured bank funding as a result. Read more
Even people who don’t normally find money markets interesting (we’ve heard such baffling types exist) might pause to consider a number like this: $160 trillion.
That’s the notional outstanding value of US dollar financial products currently indexed to the London Interbank Offering Rate, or Libor — you remember, that
rate survey that was awkwardly riggable. Read more
While in Istanbul for a blockchain conference, we came across Matt Levine’s latest Money Stuff column, in which he observes the following about the Libor manipulation and anti-trust case:
It is fairly well established that a bunch of big banks manipulated the London Interbank Offered Rate, and that the dollar numbers attached to Libor manipulation are quite large, so a bunch of investors and plaintiffs’ lawyers got together a while back to sue the banks and get some of those dollars. One of their main theories was that the banks’ collusion to manipulate Libor was an antitrust conspiracy. But the district court threw out this theory, reasoning that it can’t be an antitrust conspiracy for the banks to get together and agree on Libor, because banks getting together to agree on Libor is just Libor. It can’t be illegal to do anticompetitive stuff with Libor, because Libor isn’t a competitive market; it’s “a cooperative endeavor,” so the fact that the banks cooperated in setting a false Libor, while it might be bad, can’t be an antitrust violation. I am not an antitrust expert but I found this interpretation clever, and fairly convincing.
A quick reminder that we’ll be hosting a special edition of Macro Live today at 1:55pm to cover the release of the FOMC statement and subsequent presser.
There’s only a 3.4 per cent chance the Federal Reserve will raise rates today, according to Bloomberg’s WIRP function and the prices of overnight index swaps.
As recently as the end of December 2015, market prices implied odds of at least one rate hike by tomorrow at more than 40 per cent:
Distortions are occurring in collateralised funding and swap markets meaning secured funding is weirdly costlier than unsecured.
Bankers are blaming post-crisis leverage ratio regulation for the anomaly.
But what really does the aberration in the collateralised Fed-funds spread reflect?
Credit Suisse’s FI team puts it relatively simply this Thursday: it’s all about the cost of balance-sheet rental, which is now as scarce a commodity as oil: Read more
An expensive business, banking. There’s offices, staff, technology, terminals, compliance…
Actually, maybe it would be wise to spend a bit more on the last one. The FT’s running total of legal fines and settlements paid by banks to US regulators since 2007 now comes to $155bn.
In case you were wondering, over eight years that works out to $53m per day (including weekends, because client service is a 24 hour kind of business, right.) Read more
That was our takeaway from reading Bill Dudley’s speech at the “Workshop on Reforming Culture and Behavior in the Financial Services Industry”.
His thesis is that skewed incentives in banks and other financial firms encourage excessive risk-taking and even outright illegal behaviour. Losses from wild bets that go badly tend to be borne by shareholders and the rest of society, while the gains are often hoarded by the mid-level individuals making the trades. There is also a timing issue, where a trader can collect a bonus today for engaging in an activity that appears profitable in the short-term but has a high likelihood of catastrophic failure in the medium term. Read more
The Bank of England is going from twiddling bank capital to also twiddling mortgages themselves to try and stop risk in the UK’s housing market.
That’s big and part of an international trend among central banks. Interestingly, the Financial Policy Committee on Thursday sought direct powers to cap loan to value or debt to income ratios, versus leaving them to the PRA. Read more
Lloyds gets a $383.2m fine for Libor manipulation — split between US and UK regulators and including a fine of £70m and some £7.76 million in compensation to the BoE for manipulating the Special Liquidity Scheme (yup, the same scheme set up to help struggling banks) — and we get to relive the glory days of Libor manipulation transcripts.
Some plain vanilla from the FCA:
As brands go, the London Interbank Offered Rate – Libor – is right up there with Enron and Lehman Brothers.
So it might come as a surprise to the poor souls forced to track the level of Libor on a daily basis that the new compilers are demanding $10 a month for what used to be free for users of terminals such as Bloomberg and Reuters to look at. Read more
However late you might decide to come clean, it pays to be first to ‘fess up.
Antitrust: Commission fines banks € 1.71 billion for participating in cartels in the interest rate derivatives industry Read more
This post has been substantially revised in the wake of an internal discussion here at the FT…
Close readers will recall that just earlier this week we were pondering the case of one Richard Usher, formerly chief FX dealer for JP Morgan in London. His mangled remains were found under the proverbial publicity bus that is the official regulatory investigation into the supposed fixing of the daily WM/Reuters forex price fix, which is currently underway on both sides of the Atlantic. It seemed a shame to us that someone had been executed, professionally, for simply being in possession of an alleged Skype chat, therein containing some colourful banter. Especially when no evidence of said Skype chat had yet been presented.
It looked to us like someone, almost certainly in regulatory circles, was trading Usher’s name for political gain.
But now we’re confused. Read more
Hooray, the final version of the Iosco ‘Principles for Financial Benchmarks’ is out. It’s dull.
At least given the stakes: moving Libor — and a great deal of basic pricing in finance beyond it — towards a basis in actual transactions. Read more
A new word to you? Yes, well, we were searching for a suitable adjective to describe this:
20 June 2013
Tullett Prebon plc
Statement in relation to court proceedings
Spotted in this IMF working paper — a bracing proposal for the race to choose one rate, among several out there, to replace discredited old Libor…
Choose all of them: Read more
Barclays views it as imperative that the market has access to Benchmarks that are well constructed, transparent and that inspire the confidence of other market participants and regulators…
You can say that again.
Some (more) Libor reading landed this week — the responses from banks, and other cogs and gears of the market, to a recent report by Iosco about reforming financial benchmarks. Everyone from Thomson Reuters to the European Central Bank, Blackrock to Calpers, has weighed in here. Read more
Yes yes, the FSA had trouble passing the Wall Street Journal around the office in mid-2008.
Yeah, so “stupid Libor emails” is now an established sub-genre in banker literature.
Though the funny thing about Wednesday’s RBS revelations is that attempts at manipulation generally, at least at the start, weren’t written down. The whole problem was that people trading rates were sat right next to people in charge of submitting rates for Libor. That’s due to the “Short-Term Markets Desk”, RBS management’s October 2006 bid to “facilitate more communication”. Oops. Read more
Presenting the CFTC order against RBS, as part of the bank’s $325m settlement with the regulator over allegations of “hundreds” of attempts at manipulation of Libor (notably Yen Libor):
It’s not exactly surprising that US Libor prosecutors are pushing for criminal charges against one of Royal Bank of Scotland’s subsidiaries.
As we keep hearing, RBS’s level of involvement in the rate-rigging scandal is somewhere between Barclays, which got a nonprosecution agreement and paid $460m in penalties, and UBS, which paid $1.6bn and had to agree to having a Japanese subsidiary plead guilty to criminal charges. Read more
Soon, it appears, we’ll have another big Libor settlement to write about — this one from RBS. Both the FT and the WSJ are tipping the fines to be in the order of £500m. The FT says it could be more than £400m to the US authorities and about £100m to the FSA; the WSJ doesn’t mention how it might breakdown between the US and UK, but says the settlement “could be completed within the next two weeks”.
Also, yikes! RBS (or specifically, an Asian unit of RBS) might have to plead guilty to some criminal charges if the US prosecutors have their way, says the WSJ.
Shockingly RBS does not like this. But… RBS may not have any choice: Read more
Quite a victory for open justice on Thursday — senior Barclays bankers involved in the first major test litigation over Libor will be publicly named in court after all, after a High Court judge threw out their application for anonymity.
Full FT story here. (The FT joined other media organisations in challenging the anonymity.) Read more
The ESMA-EBA published their report on the administration and management of Euribor on Friday. Among the outline of the now familiar shortcomings of such benchmarks were tables demonstrating basic operational failures, e.g. fat finger errors by panel banks… Read more
ESMA (European Securities and Markets Authority) and the EBA (European Banking Authority) got together to make recommendations to the EEBF (Euribor-European Banking Federation) about Euribor. All the acronyms that start with E were there. It was quite the party, we’re told. Like, the EFSF got sooo drunk and nearly bailed out the Spanish government! The ESM was seriously not amused.
Anyway… Read more
The WSJ has news: “Bank Made Huge Bet, and Profit, on Libor“. The bank in question being Deutsche. The huge bet and profit being in 2008 on a bunch of rates trades.
Of course other banks did and do trade rates, in size, but let’s cut straight to the WSJ graphic… Read more
One of the things the Libor scandal has taught us is that there actually is a big contingent of people working in banks who don’t understand that emails, like puppies for Christmas, are forever. Strange, isn’t it?
To emphasize the point, Ernst and Young reported the results of an investigation, co-developed by the FBI, on language that tends to be present in electronic communications when cases of fraud are uncovered. Read more
The competition is on! Sure, UBS is already ahead of Barclays in the FSA fine stakes, but will the inevitable embarrassing communiques beat “done for you, big boy”? Opening gambit from the FSA’s Final Notice to UBS on Wednesday morning (emphasis ours):
For example, on 18 September 2008, a Trader explained to a Broker: “if you keep 6s [i.e. the six month JPY LIBOR rate] unchanged today … I will f[**]king do one humongous deal with you …
The FSA’s component of the UBS settlement relating to Libor and Euribor was £160m — the largest fine it has ever imposed.
The UK financial regulator made some revealing comments on the Swiss group’s transgressions, which it says “involved a significant number of employees and occurred over a period of years in a number of countries”: Read more
UBS will pay a total of CHF1.4bn ($1.5bn) — or, more than three Barclays — in fines and profit disgorgements related to Libor and Euribor claims. The payments will go to US, UK and Swiss regulators. The bank has also warned of losses totalling about CHF2 to 2.5bn for the fourth quarter, largely due to the settlements and provisioning, although CHF500m related to its restructuring.
Here is the statement: Read more