Wednesday, 12 June 2013

Smoke and Mirrors - Libor Settlements


In late 2012 and early 2013, two more banks, namely UBS AG (UBS) and Royal Bank of Scotland (RBS) reached settlements with regulators on both sides of the Atlantic concerning LIBOR manipulation. In both of these settlements, the regulators involved have been trumpeting their success in obtaining such large dollar amount settlements. UBS paid a total fine of $US1.5 billion while RBS agreed to pay $US610 million.

If one adds these amounts to the $US450 million already obtained from Barclays in mid-2012, the total penalties which have been paid by the major banks for LIBOR manipulation already exceeds $US2.5 billion. With the prospect of a further 13 banks likely to settle allegations of LIBOR manipulation, the total amount of fines levied against the banks could well exceed $US12 billion.

However, the reality is that the banks are getting off lightly. When one analyses the settlements reached between the financial and anti-trust regulators and UBS, one appreciates that the settlements have been carefully crafted to do minimal damage to the banks. The settlements have been structured to allow both UBS and RBS to plead guilty to wire fraud charges by their Japanese subsidiaries, rather than facing criminal fraud and anti-trust charges in the US.

Regulators appear to have allowed the banks to plead out to relatively minor criminal charges in carefully selected jurisdictions, so that they can avoid more serious consequences such as jail time for senior executives and even the loss of their US banking licences

The main culprit in the settlements is the US Department of Justice (DOJ). Other regulators, such as the Financial Services Authority (FSA) in the UK and the Commodities Futures Trading Commission (CFTC) in the US, do not have criminal jurisdiction. Therefore, the only sanctions they can seek are civil pecuniary penalties.

However, the same cannot be said for the DOJ’s Criminal Division or the Antitrust Division, which both have criminal jurisdiction. By not pursuing serious criminal charges against the banks and their senior managers, these two agencies have failed to enforce their legislation properly. Their enforcement efforts should be aimed at adequately punishing wrongdoing in order to achieve both specific and general deterrence. Put simply, these settlements are not going to deter banks from continuing to engage in fraud and cartel behaviour in the future.

In this post, I will discuss the recent LIBOR settlements, with a particular focus on the UBS settlement.

UBS Settlement

On 19 December 2012, the US Department of Justice announced it settlements with UBS.[1] The specific details of the settlement were as follows.

UBS Japan signed a plea agreement with the US government admitting criminal conduct, and agreeing to pay a $100 million fine.

In addition, UBS AG, the parent company of UBS Japan headquartered in Zurich, entered into a non-prosecution agreement (NPA)[2] with the US government requiring that the company:

  •  an additional $400 million penalty;
  • admit and accept responsibility for its misconduct; and 
  • continue cooperating with the DOJ in its ongoing investigation. 
The NPA stated that the settlement reflected UBS AG’s substantial cooperation in discovering and disclosing LIBOR misconduct within the financial institution and recognized the significant remedial measures undertaken by new management to enhance internal controls.

In addition, UBS AGS agreed to pay a further $1 billion in regulatory penalties and disgorgement:
  • $700 million as a result of the CFTC action; 
  • $259.2 million as a result of the FSA action; and 
  • $64.3 million as a result of the Swiss Financial Markets Authority action.
Therefore, the total penalty and disgorgements paid by UBS in relation to LIBOR manipulation was approximately $1.5 billion.

Setting LIBOR

As outlined in the Statement of Facts,[3] which accompanied the NAP, it appears that until 1 September, 2009, UBS’s LIBOR submissions were made by UBS’s derivatives traders. In other words, the very UBS staff members who had the most to gain from manipulating the LIBOR, namely derivatives traders, were responsible for calculating and submitting UBS’s LIBOR submissions.

On 1 September, 2009, a new UBS department called “Asset and Liability Management” (ALM) took over the LIBOR submission process from the derivatives trading desks. This change came about after UBS’s Compliance Department reached the conclusion that there was an inherent conflict of interest in having derivatives traders determining UBS’s daily benchmark submissions.

Despite coming to this obvious conclusion, UBS continued to allow derivatives traders to provide input to ALM on UBS’s LIBOR submissions. Each day, approximately 15 minutes before ALM made its LIBOR and Euribor submissions on behalf of UBS, derivatives traders in a given currency would input their assessment of LIBOR and Euribor changes into a shared spreadsheet. The ALM submitters would then consider that input, along with the previous day’s submissions, and work out the LIBOR submissions for that day.

It also appears that from as early as 2001 through at least June 2010, certain UBS derivatives traders requested and obtained benchmark interest-rate submissions to benefit their trading positions.

These derivatives traders requested, and sometimes even directed, certain UBS LIBOR, Euroyen TIBOR, and Euribor submitters to submit benchmark interest rates that would benefit the traders’ trading positions.

The derivatives traders made these requests in electronic messages, telephone conversations, and in-person conversations. The LIBOR, Euroyen TIBOR, and Euribor submitters regularly agreed to accommodate the derivatives traders’ requests and directions for favourable benchmark interest rate submissions.

Examples of LIBOR manipulation

The following are some examples of the types of conduct which was occurring in UBS, on an almost daily basis, at the relevant time:

Example 1
On Monday, November 20, 2006, Trader-1 asked the UBS Yen LIBOR submitter (“Submitter 3”), who was substituting for the regular submitter (“Submitter 1”) that day:
Submitter 3 - “hi . . . [Submitter-1] and I generally coordinate ie sometimes trade if ity [sic] suits, otherwise skew the libors a bit.”
Trader-1 - “really need high 6m [6-month] fixes till Thursday.”
Submitter 3 - “yep we on the case there . . . will def[initely] be on the high side.”
The day before this request, UBS’s 6-month Yen LIBOR submission had been tied with the lowest submissions included in the calculation of the LIBOR fix. Immediately after this request for high submissions, however, UBS’s 6-month Yen LIBOR submissions rose to the highest submission of any bank in the Contributor Panel and remained tied for the highest until Thursday – as Trader 1 had requested,
Example 2
On March 29, 2007, Trader 1 asked Submitter 1:
Trader 1 - “can we go low 3[month] and 6[month] pls? . . . 3[month] esp.”

Submitter 1 - “ok”
Trader 1 - what are we going to set?
Submitter 1 – “too early to say yet . . . prob[ably] .69 would be our unbiased contribution”
Trader 1 - ok wd really help if we cld keep 3m low pls
Submitter 1 - as i said before - i [don’t] mind helping on your fixings, but i'm not setting libor 7bp away from the truth. . . i'll get ubs banned if i do that, no interest in that.
Trader 1 - ok obviousl;y [sic] no int[erest] in that happening either . . . not asking for it to be 7bp from reality anyway any help appreciated[.]
Trader 1 received the help he requested. Although Submitter-1’s “unbiased contribution” of the 3-monthYen LIBOR submission would have been .69 that day, he lowered his/her submission to.67, as Trader-1 requested

Example 3

On April 4, 2008 electronic chat between Trader 1 and Submitter 2, the following exchange occurred:
Trader 1 - have you put the libors in?
Submitter 2 - y[es] . . . any changes?
Trader 1 - oh was going to ask high 6m if not too late
Submitter 2 - i input 95 . . . which is on the lower side
Trader 1 - ok is it too late to change? . . . if not no drama
Submitter 2 - i try to change it now but cannot guarantee if it gets accepted
Submitter 2 - just cahnged [sic]it to 0.98
In this example, the UBS submitter was able to change the UBS submission after it had been lodged.
Example 4

On March 31, 2009 Trader 1 asked Broker C to help influence 9 of the 16 Contributor Panel banks by convincing them to lower their LIBOR submissions from the previous day, thus lower the resulting 1-month and 3-month Yen LIBOR fix:
Trader 1 - mate we have to get 1m and 3m down . . . 1m barely fell yesterday . .. real important.
Broker C - yeah ok
Trader 1 - banks to have a go w in 1m are
Trader 1 - [Bank-F]
Trader 1 - [Bank-G]
Trader 1 - [Bank-H]
Trader 1 - [Bank-E]
Trader 1 - [Bank-I]
Trader 1 - [Bank-C]
Trader 1 - [Bank-A]
Trader 1 - [Bank-J] 
Trader 1 - and [Bank-K]
Trader 1 - pls
Broker C - got it mate
That day, consistent with Trader-1’s request, 6 of the 9 Contributor Panel banks listed above lowered their 1-month Yen LIBOR submissions relative to the previous day, and the resulting published 1-month Yen LIBOR fix dropped by a full basis point from the day before.
In other words, it would appear that the Broker was able to convince up to six of the banks involved in submitting LIBOR rates to collude in relation to their submissions for the 1-month Yen LIBOR rate.
Example 5
On 22 July, 2009 Trader 1 described his plan to coordinate Yen LIBOR submissions with other Contributor Panel banks over the next few weeks while staggering drops in submissions so as to avoid detection 
Trader 1 - 11th aug is the big date . . . i still have lots of 6m fixings till the 10th
Broker A1 - if you drop your 6m dramatically on the 11th mate, it will look v fishy, especially if [Bank D] and [Bank B] go with you. I'd be v careful how you play it, there might be cause for a drop as you cross into a new month but a couple of weeks in might get people questioning you.
Trader 1 - don't worry will stagger the drops . . . ie 5bp then 5bp
Broker A1 - ok mate, don't want you getting into shit
Trader 1 - us then [Bank B] then [Bank D] then us then [Bank B] then [Bank D]
Broker A1 - great the plan is hatched and sounds sensible
Aggravating factors

The Statement of Facts lists many aspects of UBS’s LIBOR manipulation which would be considered by most regulators to be serious aggravating factors, which would justify more serious penalties.

For example, paragraph 22 of the Statement of Facts states:

22. Beginning in 2006, in Zurich, Tokyo, and elsewhere, several UBS employees engaged in sustained, wide-ranging, and systematic efforts to manipulate Yen LIBOR and, to a lesser extent, Euroyen TIBOR, to benefit UBS’s trading positions. This conduct encompassed hundreds of instances in which UBS employees sought to influence benchmark rates; during some periods, UBS employees engaged in this activity on nearly a daily basis. In furtherance of these efforts to manipulate Yen benchmarks, UBS employees used several principal and interrelated methods, including the following:
a) internal manipulation within UBS of its Yen LIBOR and Euroyen TIBOR submissions;
b) use of cash brokers to influence other Contributor Panel banks’ Yen LIBOR submissions by disseminating misinformation; and
c) efforts to collude directly with employees at other Contributor Panel banks, either directly or through brokers, in order to influence those banks’ Yen LIBOR submissions.
In other words, the DOJ obtained evidence which showed that UBS’s conduct had been “sustained, wide-ranging and systematic” and that there had been “hundreds of instances” of UBS seeking to illegally influence the LIBOR. The DOJ also found evidence of collusion.

Furthermore, there was compelling evidence that senior UBS management:

  • were aware of the LIBOR manipulation;
  •  sought to conceal the conduct and
  • sought to obstruct the LIBOR investigation.

36. Certain UBS managers, and senior managers, were aware of the internal manipulation of Yen LIBOR and Euroyen TIBOR submissions by derivatives traders as described above….]

37. The majority of UBS Yen LIBOR and Euroyen TIBOR submitters, Yen derivatives traders, and their supervisors – as well as the more senior managers at UBS who were aware of this conduct – knew that the manipulation of Yen LIBOR and TIBOR submissions was inappropriate, yet continued to encourage, allow, or participate in this conduct…

Another example of the knowledge of senior UBS managers related to the involvement of the UBS representative on the British Banking Association (BBA) LIBOR Committee. His role on the BBA Libor Committee was to scrutinize LIBOR submissions to make sure they were accurate.

On one occasion, shortly after an UBS Euribor submitter had asked a number of UBS derivatives traders, in an internal UBS online chat forum, what LIBOR rates they wanted, the UBS BBA Committee representative responded by saying “Just be careful dude”. The submitter responded by saying “I agree we shouldn’t ve (sic) been talking about putting fixings for our positions on public chat.”


38. Because UBS’s Yen LIBOR submitters, derivatives traders, and their managers knew this conduct was improper, they tried to conceal the manipulation. For example, after an August 10, 2009 Trader-1 email request to lower 6-month Yen LIBOR, a LIBOR submitter (“Submitter-4”) complained to Trader-1’s manager that these requests should not be in writing. Moreover, Trader-1 would sometimes request that LIBOR submissions be moved in small increments over time to avoid detection.
The Statement of Facts records the fact that after media reports regarding the banks suspected LIBOR manipulation first appeared, UBS managers cautioned staff to avoid creating written records and instead suggested that they use mobile phones to contact brokers in future.


39. Finally, and for the same reason, a UBS derivatives desk manager sought to obstruct the investigation into LIBOR manipulation. In December 2010, Submitter-4, the UBS derivatives desk manager who had supervised Submitter-2 in 2009, instructed Submitter-2 to lie when interviewed by UBS attorneys during the investigation into LIBOR manipulation. Among other things, the UBS manager instructed Submitter-2 to:

  • falsely claim that the UBS Yen trading desks did not have any derivative positions with exposure to Yen LIBOR;

  • avoid mentioning Trader-1;

  • falsely indicate that the Yen LIBOR submission process did not take into account trading positions;

  • falsely claim that they never moved the Yen LIBOR submissions to benefit the Yen trading desks;

  • falsely claim that when contributing Yen LIBOR submissions, UBS tried to be “as close to the market as possible.”
The following quote best captures the view within UBS that LIBOR rates were nothing more than fictitious numbers:
UBS Employee - why is the [Investment Bank] cash curve for USD so much higher than Libor? offered 35bps above libor currently
ALM employee - because the real cash market isn't trading anywhere near Libor . . . Libors currently are even more fictitious than usual
UBS Employee - isn't libor meant to represent the rate at which banks lend to each other? 
ALM employee - that's the theory . . . in practise, it's a made up number . . .hence all the critisism it was getting a few months ago
UBS Employee - why do banks undervalue it in times like this?
ALM employee - so as to not show where they really pay in case it creates headlines about that bank being desparate for cash . . . I suspect
Smoke and mirrors

As was the case with the Barclays settlement, the DOJ was keen to trumpet its own success. As stated by Attorney General Holder:

By causing UBS and other financial institutions to spread false and misleading information about LIBOR, the alleged conspirators we've charged – along with others it UBS – manipulated the benchmark interest rate upon which many transactions and consumer financial products are based. They defrauded the company's counterparties of millions of dollars. And they did so primarily to reap increased profits, and secure bigger bonuses, for themselves.
Today's announcement – and $1.5 billion global resolution – underscores the Justice Department’s firm commitment to investigating and prosecuting such conduct and to holding the perpetrators of these crimes accountable for their actions.
Not to be outdone, the Assistant Attorney General of the Justice Department’s Criminal Division, Mr Lanny Breuer stated:
UBS manipulated one of the cornerstone interest rates in our global financial system. This scheme alleged is epic in scale, involving people have walked the laws of some of the most powerful banks in the world. Today's agreements by UBS Japan to plead guilty, the charges against individual alleged perpetrators of these crimes, and our agreement recognizing the steps being taken by UBS AG to right itself demonstrates the Justice Department's determination to hold accountable those in the financial marketplace who break the law. We cannot, and we will not, tolerate misconduct on Wall Street of a kind admitted to by UBS today, and by Barclays last June. We will continue to follow the facts and the law where ever they lead us in this matter as we do in every case.
Finally, Deputy Asst Attorney General Scott D. Hammond of the DOJ’s Anti-Trust Division, an enforcer noted for his hardline and uncompromising approach to cartel behaviour, added:
The criminal complaint charges two senior UBS traders with colluding to manipulate the Yen LIBOR interest-rates for the purpose of improving training positions held by Hayes and UBS. Coordinating the movement of interest rates even by a very small margin meant higher profits and bigger bonuses for the conspirators at the expense of those that relied on LIBOR as a reference rate.
One has to ask oneself the simple question – if the conduct engaged in by UBS was so egregious and blatant, why weren’t UBS and its senior managers charged with criminal offences for both fraud and cartel conduct? Further, why was the only criminal charge against a Japanese subsidiary of UBS and why was that charge only for wire fraud?

The simple answer to these questions is that the DOJ has compromised its settlements to such an extent that they have failed to deal effectively with the underlying criminality of the conduct. It is inappropriate from any proper enforcement perspective to accept large cash settlements from perpetrators of serious criminal offences in return for not pursuing serious criminal charges against them.

Put plainly, theses settlements represent nothing more than banks buying their way out of criminal liability.

One cannot criticise such organisations as the FSA or the CFTC from accepting large cash settlements. These organisations do not have criminal jurisdiction and cannot file criminal charges against corporations or send individuals to jail. On the other hand, the DOJ’s Criminal Division and the Antitrust Division do have criminal jurisdiction.

The DOJ should have charged UBS’s parent company, its US subsidiaries and its senior managers with multiple criminal offences, including wire fraud and cartel offences.

After accepting three patently inadequate settlements from Barclays, UBS and RBS, it will be increasingly difficult for the DOJ to get serious about LIBOR manipulation and collusion in the future and to pursue more serious penalties. Other banks will no doubt argue that they should not be treated any differently or more harshly than Barclays, UBS and RBS, who have received proverbial “slaps on the wrist”. Indeed, it may be left to the UK Serious Fraud Office to pursue appropriate criminal charges against the remaining banks to ensure that they are ultimately held to account for their serious and blatant criminal conduct.

[1] UBS Securities Japan Co. Ltd. to Plead Guilty to Felony Wire Fraud for Long-running Manipulation of LIBOR Benchmark Interest Rates at DOJ website -
[2] Non-Prosecution Agreement – dated 18 December 2012 -
[3] Statement of Facts – Appendix A to Non-Prosecution Agreements -