The Financial Services Authority (FSA) has fined UBS AG (UBS) £160 million for misconduct relating to the London Interbank Offered Rate (LIBOR) and the Euro Interbank Offered Rate (EURIBOR). This is the largest fine ever imposed by the FSA.
UBS’s breaches of the FSA’s requirements encompassed a number of issues, involved a significant number of employees and occurred over a period of years in a number of countries. Between 1 January 2005 to 31 December 2010 the misconduct included:
- UBS’s traders routinely making requests to the individuals at UBS responsible for determining its LIBOR and EURIBOR submissions to adjust their submissions to benefit the traders’ trading positions.
- Giving the roles of determining its LIBOR and EURIBOR submissions to traders whose positions made a profit or loss depending on the LIBOR / EURIBOR fixes. This combination of roles was a fundamental flaw in organisational structure given the inherent conflict of interest between these two roles.
- Colluding with interdealer brokers in co-ordinated attempts to influence Japanese Yen (JPY) LIBOR submissions made by other panel banks. Corrupt brokerage payments were made to reward brokers for their efforts to manipulate the LIBOR submissions of panel banks.
- Colluding with individuals at other panel banks to get them to make JPY LIBOR submissions that benefited UBS’s trading positions.
- Adopting LIBOR submissions directives whose primary purpose was to protect the bank’s reputation by avoiding negative media attention about its submissions and speculation about its creditworthiness.
The misconduct was extensive and widespread. At least 2,000 requests for inappropriate submissions were documented – an unquantifiable number of oral requests, which by their nature would not be documented, were also made. Manipulation was also discussed in internal open chat forums and group emails, and was widely known. At least 45 individuals including traders, managers and senior managers were involved in, or aware of, the practice of attempting to influence submissions. The routine and widespread manipulation of the submissions was not detected by Compliance or by Group Internal Audit, which undertook five audits of the relevant business area during the relevant period.
Even when the trading and submitting roles were split in Autumn 2009, UBS’s systems and controls did not prevent traders from camouflaging their requests as “market colour”. Given the widespread and routine nature of the requests to change LIBOR and EURIBOR and the nature of the control failures, the FSA found that every LIBOR and EURIBOR submission, in currencies and tenors in which UBS traded during the relevant period, was at risk of having been improperly influenced to benefit derivatives trading positions.
The misconduct occurred in various locations around the world including Japan, Switzerland, the UK and the USA.
Tracey McDermott, FSA director of enforcement and financial crime, said:
“The findings we have set out in our notice today do not make for pretty reading. The integrity of benchmarks such as LIBOR and EURIBOR are of fundamental importance to both UK and international financial markets. UBS traders and managers ignored this. They manipulated UBS’s submissions in order to benefit their own positions and to protect UBS’s reputation, showing a total disregard for the millions of market participants around the world who were also affected by LIBOR and EURIBOR. UBS’s misconduct was all the more serious because of the orchestrated attempts to manipulate the JPY LIBOR submissions of other banks as well as its own and the collusion with interdealer brokers and other panel banks in coordinated efforts to manipulate the fix.
“Over an extended period UBS allowed this to happen through its failure to control its business appropriately to ensure that LIBOR and EURIBOR submissions properly reflected the relevant requirements. There should be no doubt about how seriously the FSA views these failings. This is our largest penalty to date and demonstrates our commitment to ensuring that those in the wholesale markets do not put their own interests above those of the markets as a whole.”
The FSA continues to pursue a number of other significant cross-border investigations in relation to LIBOR and EURIBOR.
UBS did not qualify for the full 30% discount available for early settlement under the FSA’s settlement discount scheme (known as “Stage One”). Because settlement was reached in the second phase of the discount scheme (known as “Stage Two”), UBS received a reduced discount of 20%. Without the discount the fine would have been £200 million.
This was a significant cross-border investigation and, in particular, the FSA would like to thank the U.S. Commodity Futures Trading Commission (CFTC), the U.S. Department of Justice (DoJ) (together with the Federal Bureau of Investigation (FBI)), the Swiss Financial Market Supervisory Authority (FINMA) and the Securities and Exchange Commission (SEC) for their co-operation.
Notes for editors
- The Final Notice for UBS AG[1].
- On 27 June 2012 the FSA fined Barclays Bank plc £59.5 million[2] for misconduct relating to LIBOR and EURIBOR.
- On 2 July 2012 the Chancellor of the Exchequer commissioned Martin Wheatley, Managing Director of the FSA and Chief Executive-designate of the Financial Conduct Authority, to undertake a review of the structure and governance of LIBOR and the corresponding criminal sanctions regime. On 28 September 2012 the Wheatley Review published its final report ‘The Wheatley Review of LIBOR[3]’, which included a 10-point plan for comprehensive reform of LIBOR. On 17 October 2012 the government accepted the Review’s recommendations in full, and amended the upcoming Financial Services Bill accordingly. On 5 December 2012 the FSA launched a consultation paper[4] on changes to the regulation and supervision of benchmarks.
- LIBOR and the EURIBOR are benchmark reference rates that indicate the interest rate that banks charge when lending to each other. They are fundamental to the operation of both UK and international financial markets, including markets in interest rate derivatives contracts.
- LIBOR and EURIBOR are used to determine payments made under both over the counter (OTC) interest rate derivatives contracts and exchange traded interest rate contracts by a wide range of counterparties including small businesses, large financial institutions and public authorities. Benchmark reference rates such as LIBOR and EURIBOR also affect payments made under a wide range of other contracts including loans and mortgages. The integrity of benchmark reference rates such as LIBOR and EURIBOR is therefore of fundamental importance to both UK and international financial markets.
- LIBOR is published on behalf of the British Bankers’ Association (BBA) and EURIBOR is published on behalf of the European Banking Federation (EBF). LIBOR and EURIBOR are calculated as averages from submissions made by a number of banks selected by the BBA or EBF. There are different panels of banks that contribute submissions for each currency in which LIBOR is published, and for EURIBOR.
- LIBOR and EURIBOR are by far the most prevalent benchmark reference rates used in euro, US dollar and sterling OTC interest rate derivatives contracts and exchange traded interest rate contracts. The notional amount outstanding of OTC interest rate derivatives contracts in the first half of 2012 has been estimated at 315 trillion Pounds Sterling. The total value of volume of short term interest rate contracts traded on LIFFE in London in 2011 was 477 trillion euro including over 241 trillion euro relating to the three month EURIBOR futures contract (the fourth largest interest rate futures contract by volume in the world).
- Throughout the Relevant Period between 7 and 16 banks contributed to the different LIBOR currency panels. Every LIBOR rate was calculated using a trimmed arithmetic mean. Submissions for each currency and maturity made by the banks were ranked in numerical order and the highest 25% and lowest 25% were excluded. The remaining contributions were then arithmetically averaged to create the final published LIBOR rate.
- Throughout the Relevant Period, the EURIBOR panel consisted of at least 40 banks and in each maturity the rate calculation excluded the highest 15% and lowest 15% of all the submissions collated. A rounded average of the remaining submissions was taken to produce the final published EURIBOR.
- The direct impact of actual manipulation of the LIBOR and EURIBOR fix on UK retail consumers is likely to be minimal:
- Retail products in the UK are typically linked to base rate, rather than LIBOR. For example, retail mortgages pegged to GBP LIBOR are a niche product;
- The traders were dealing in contracts in various currencies valued in the hundreds of millions. They were seeking to influence the fix by fractions of a basis point (1 basis point is 100th of 1%) where small movements would have a material financial impact on those high value contracts. In contrast, the economic impact of a fraction of a basis point movement up or down on a much lower value retail contract would be minimal;
- Furthermore, even if a retail contract was linked to LIBOR, it would only be impacted if the link was to the specific LIBOR currency concerned, in the specific tenor (eg three month Japanese yen LIBOR) for the specific fixing date; and
- The manipulation of submissions was, at times, for higher and, at times, for lower submissions. Therefore, even if there was an impact on the relevant LIBOR fix, it could have had the effect of making the product more or less expensive to the retail consumer concerned (albeit by a minimal amount).
- The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; securing the appropriate degree of protection for consumers; fighting financial crime; and contributing to the protection and enhancement of the stability of the UK financial system.
- The FSA will be replaced by the Financial Conduct Authority and Prudential Regulation Authority in 2013. The Financial Services Bill[5] is currently expected to receive Royal Assent in late 2012 or early 2013.