This article considers some of the implications of the LIBOR interbank interest rate-rigging scandal in which a number of top-flight banks have been implicated.

Editor’s
note: This article considers some of the implications of the LIBOR
interbank interest rate-rigging scandal in which a number of top-flight
banks have been implicated. The article is by Owen Watkins, barrister in
the corporate team of law firm Lewis Silkin. While the case examines a number of UK examples, the use of LIBOR and other benchmarks in Asia means that the issues here are relevant as much in the Asia-Pacific region as they are elsewhere. This publication is
pleased to share these views with readers, but as ever does not
necessarily endorse the views of the article.

On 6 February, the Financial Services Authority, the US Commodity
Futures Trading Commission and the US Department of Justice announced
significant fines on Royal Bank of Scotland for manipulating various
London Interbank Offered Rate benchmarks. In total, the fines amounted
to $612 million, of which the FSA share was £87.5 million ($137
million). These are significant amounts, and there are very good reasons
why the fines were so severe.

LIBOR is the most frequently used benchmark for interest rates
globally, referenced in transactions with a notional outstanding value
of at least $500 trillion. It is also by far the most prevalent
benchmark rate used in over-the-counter interest rate derivatives
contracts and exchange-traded interest rate contracts. LIBOR is
therefore a cornerstone of the global financial system. In brief, LIBOR
represents the average rate for a particular currency and a particular
time period that banks pay to borrow from one another, and its
formulation is contributed to each and every business day by banks on
the relevant LIBOR panel – known as “contributing banks” – submitting
the rates they think they would have to pay.
RBS is, in fact, the third bank to be fined for LIBOR manipulation -
following Barclays (total fines $450 million) and UBS (total fines $1.5
billion) – and the account of RBS's misconduct set out by the
regulators is very similar to that seen already in the Barclays and UBS
cases. In what the DoJ described as “a stunning abuse of trust”, LIBOR
submissions made by RBS were designed to benefit its own trading book,
rather than being an independent assessment of the market. RBS
derivatives traders openly canvassed those tasked with submitting LIBOR
rates on behalf of the bank to submit higher or lower rates depending on
what would benefit their positions.

In some cases, the derivatives traders would also act as the rate
submitters – a clear conflict of interest which RBS did nothing to
resolve. Furthermore, there appears to have been a network of
individuals outside RBS who colluded with RBS derivatives traders to
persuade other banks on LIBOR panels to make LIBOR submissions that
would benefit RBS derivatives positions.

Surprising

Given that RBS was a major financial institution, and thus on the FSA’s
risk-based approach requiring close supervision with frequent monitoring
visits, it is surprising (to put it no higher) that the FSA failed to
pick up the abuse earlier, particularly as certain aspects of it would
have been fairly obvious, such as the close physical proximity between
LIBOR rate setters and derivatives traders and the frequent contact
between them. Be that as it may, the level of the fines – in the FSA's
case, the three largest it has imposed – shows the seriousness with
which the regulators regard what went on. Given the importance of LIBOR
to the workings of the global financial markets, any attempt to
undermine the integrity of LIBOR undermines the financial system
generally, and thus in the eyes of regulators merits an appropriately
heavy penalty.
RBS has clearly suffered some reputational damage as a result of its
actions in relation to LIBOR. Yet the signs are that, like UBS, its
behaviour has attracted far less attention than that of Barclays, which
was the first to settle with regulators. Barclays may have hoped for
some sort of "first mover advantage" and to pick up credit for its
cooperation with the regulators. Yet in practice it received little or
no positive publicity for doing so, as the press concentrated on the
more salacious details (such as offers of champagne for co-operating in
manipulating rates) and the departure of its then chief executive, Bob
Diamond, which kept the story alive for several days.

Indeed, by being the first to admit to manipulation, Barclays may
paradoxically have suffered all the bad publicity for its behaviour,
while reducing the effect of an admission of wrongdoing by those who
settled later (on the basis that the popular view, formed by Barclays'
actions, was that “this is what all banks do”, and would move swiftly
on). One wonders whether, knowing what they now know, Barclays would
have acted differently.

Although RBS is the latest bank to face penalties arising from LIBOR
manipulation, it is unlikely to be the last. The regulators are pursuing
other major financial institutions and we can expect further
announcements in the coming months.

In addition, the regulators are taking action against the main
individuals involved in the rate fixing; on the basis of the penalties
imposed on the firms, it is likely that these individuals face heavy
fines and a ban from the industry. This story therefore has some
considerable way yet to run.