Fixing LIBOR: some preliminary findings - Treasury Contents

2  Manipulation by individuals with the intention of personal benefit

The misconduct

25. The FSA found that between January 2005 and July 2008 Barclays was in breach of the FSA's principle 5 "by making US dollar LIBOR and EURIBOR submissions which took into account requests made by its interest rate derivatives traders".[28] This phase of LIBOR manipulation differed from that discussed later in this Report, as it centred on a group of traders attempting "to benefit their own trading positions", rather than acting in the immediate financial interests of Barclays overall.[29]

26. Barclays' traders were aware of how even small movements in LIBOR or EURIBOR would be of benefit to them, with the FSA noting that "Barclays' Derivatives Traders knew on any particular day what their books' exposure to a one basis point (0.01%) movement in LIBOR or EURIBOR was".[30] Because of the central role LIBOR and EURIBOR played in how derivatives contracts were drawn up, the attempted manipulation of these reference rates "could have made the Derivatives Traders profit or reduced a loss".[31]

27. To alter the Barclays' LIBOR submission, and thus try and alter the overall LIBOR rate, the traders had to collude with those in Barclays who submitted the LIBOR figures (the submitters) to submit figures that were to the traders' benefit. In its investigation, the FSA identified that:

    between January 2005 and May 2009, at least 173 requests for US dollar LIBOR submissions were made to Barclays' Submitters (including 11 requests based on communications from traders at other banks);

    between September 2005 and May 2009, at least 58 requests for EURIBOR submissions were made to Barclays' Submitters (including 20 requests based on communications from traders at other banks); and

    between August 2006 and June 2009, at least 26 requests for yen LIBOR submissions were made to Barclays' Submitters.[32]

As we have seen, the traders knew that small changes in LIBOR could have large effects. The FSA noted that:

    For example in a telephone call on 12 September 2007, the Submitter indicated that Barclays' Derivatives Traders had an interest in high three month LIBOR submissions 'for about a couple of million dollars a basis point. Ah, but I don't know how much longer I'm gonna be able to keep it up at seventy seven'. [33]

The Governor of the Bank of England noted that:

    I was very struck and surprised, when reading these three reports [from the regulatory authorities], to discover that changing LIBOR by one basis point was the kind of rigging that people were interested in. You would never have noticed that from market activity. We were worried about tens of basis points.[34]

The Committee was surprised and disappointed by the Governor's remarks, given the scale of the value of a single basis point, notwithstanding that the Bank of England did not have statutory regulatory powers.

28. Barclays as a whole, though, would not necessarily have benefited from the actions of its traders. Mr Diamond denied that the traders acted on behalf of Barclays. He told us that: "They [the traders] were acting on behalf of themselves. It is unclear whether it benefited Barclays but I don't think they had any interest in benefiting Barclays, they were benefiting themselves".[35] Jerry del Missier, former Chief Operating Officer of Barclays, when asked how a trader would benefit their own bonus by asking submitters to falsify the LIBOR submissions, noted the complexity of what the traders were trying to achieve, and how the outcome might not be to Barclays' benefit:

    It is very complex, and it is not entirely obvious that you are actually benefiting your own profitability, but the theory would be that if you got a certain rate submitted, the book that you were trading would benefit from that submission. It is important to understand that it is not even the whole bank—it is one particular book. On any given day, the bank does not know whether it benefits from high rates or low rates but, again, because of the complexity of the averaging process, it is extremely difficult to see how one rate would have an impact, and then how that would necessarily flow through to compensation is very convoluted.[36]

Lord Turner, Chairman of the FSA, emphasised the difficulty of proving how far the traders had benefitted individually. While he said it wasn't impossible, he noted that "That would be a very complicated thing to do, because you would have to work out what they would have put in when they did not put this in, and then you have to work out what that would have done to the average".[37] When asked whether the traders had been successful, Lord Turner told us that:

    The fact is that although it is very difficult to work out exactly what would have changed with the LIBOR rate if they had not been manipulating, you have to assume [...] that if someone had been induced to put in a higher figure than they otherwise would, LIBOR must have been at least some small bit higher, and you have to assume, as you say, that these traders were not entirely irrational, or that they believed that they were having an influence. Of course, the crucial issue here is that we are dealing in the derivatives market, with an environment in which minute movements in the LIBOR rate might have a very significant impact on very specific positions that they were holding at that time. That is somewhat different from, for instance, the consumer market, where single basis point movements would be unlikely to have a really material effect on, say, the cost of a mortgage.[38]

29. Other commentators believed that the actions of single submitting institutions could influence the overall rate. On 16 July 2012 Bloomberg carried a report showing how individual traders sought to do this. The Bloomberg report said, "By making a submission too high to be included in the average, a single lender can push a previously excluded rate back into the pack to send the average higher. By submitting a rate that falls too low to be included, the average can be nudged down as a previously excluded rate re-enters the pack."[39]


30. More worryingly, the FSA found that this misconduct, on occasion, was not limited to Barclays and extended to other banks. The Final Notice emphasised the benefits of such collusion with other banks. It stated that:

    Where Barclays made submissions which took into account the requests of its own Derivatives Traders, or sought to influence the submissions of other banks, there was a risk that the published LIBOR and EURIBOR rates would be manipulated. Barclays could have benefited from this misconduct to the detriment of other market participants. Where Barclays acted in concert with other banks, the risk of manipulation increased materially.[40]

31. Since the enforcement procedures on other banks continue, it is difficult to assess how far there was collusion between banks, but in its Final Notice, the FSA indicated that:

    At least 12 of the US dollar LIBOR requests made to Barclays' Submitters were made on behalf of external traders that had previously worked at Barclays and were now working at other banks (although those banks did not contribute US dollar LIBOR submissions).[41]

And that:

    At least 20 of the EURIBOR requests made by the Derivatives Traders were made on behalf of traders at other banks that contributed EURIBOR rates. Barclays' Derivatives Traders passed on the requests of these other traders to Barclays' Submitters, even blind copying in the external traders to their emails in order to demonstrate they had done so. [42]

The FSA also found that:

    Barclays' Derivatives Traders attempted to influence the EURIBOR (and to a much lesser extent, US dollar LIBOR) submissions of other banks by making requests to external traders. One of the Derivatives Traders also embarked on co-ordinated strategies to align Barclays' positions with traders at other banks and to influence the EURIBOR rates published by the EBF.

    Between February 2006 and October 2007, Barclays' Derivatives Traders made at least 63 requests to external traders with the aim that those traders would pass on the requests for EURIBOR and US dollar LIBOR submissions to their banks' submitters. 56 of those requests related to EURIBOR submissions. Five Derivatives Traders made the requests to external traders. [43]

32. We asked witnesses what this behaviour meant about the culture of Barclays, and of the banking industry more widely. The Final Notice by the FSA paints a picture of a close-knit group of people collude to try to manipulate LIBOR. For instance, the following conversations are noted:

    Trader C requested low one month and three month US dollar LIBOR submissions at 10:52 am on 7 April 2006 (shortly before the submissions were due to be made); "If it's not too late low 1m and 3m would be nice, but please feel free to say "no"... Coffees will be coming your way either way, just to say thank you for your help in the past few weeks". A Submitter responded "Done…for you big boy".[44]

    on 26 October 2006, an external trader made a request for a lower three month US dollar LIBOR submission. The external trader stated in an email to Trader G at Barclays "If it comes in unchanged I'm a dead man". Trader G responded that he would "have a chat". Barclays' submission on that day for three month US dollar LIBOR was half a basis point lower than the day before, rather than being unchanged. The external trader thanked Trader G for Barclays' LIBOR submission later that day: "Dude. I owe you big time! Come over one day after work and I'm opening a bottle of Bollinger". [45]

Lord Turner said that actions over this period indicated a cultural weakness within Barclays. Referring to the period in which the rogue traders operated, he noted that:

    Nevertheless, there does seem to have been a culture that allowed this to occur. One of the shocking things about this is that on some occasions, the derivatives trader is not asking the submitter to change his submission on the basis of a hidden phone call or a note that he believes is hidden, but by shouting it across the trading floor. That suggests something is deeply wrong with the culture that could possibly have allowed that to occur.[46]

33. Mr Diamond though was keen to emphasise that this phase of wrong-doing was limited to a small set of Barclays' employees. He said that "It was 14 traders [...]. We have a couple of thousand traders."[47] A similar view was also expressed by Mr Agius, who when asked whether Barclays was in denial over the scale of the problem, replied:

    No, not in denial of the scale of it, because although it went on for a long period of time, it was undetected. It should have been detected and should never have happened in the first place—all of that is absolutely clear—but it was not endemic across the whole bank. It was isolated in one area that was under­monitored [...]. That does not excuse it.[48]

Lord Turner accepted that "I think it is probably the case that the total number of people identified in this investigation and others will end up as a relatively small number."[49] He did however also accept when questioned that some traders may not have been caught:

    Stewart Hosie: [...] In terms of the traders who have been caught, it was because they left an electronic trail. If they speak informally orally in the pub, outwith the recorded net, there could be many more. Is this the tip of an iceberg?

    Lord Turner: Almost by definition, I don't know, because I only know what we are capable of finding out. I would be amazed if it is everything, precisely for the reasons you suggest. If people are acting in a way that leaves a legally identifiable trail, it would be very surprising if there are not other activities without a legally identifiable trail. We know in general that market abuse or manipulation of any category is incredibly difficult to spot, because often people are clever enough to do it in a verbal, off-the-record, off-the-legal-trail basis.[50]

On 2 July 2012, Barclays announced that it would undertake a review of its business practices.[51] On 24 July 2012, following our hearings, Barclays announced the terms of reference of a review to be led by Anthony Salz, Executive Vice Chairman of Rothschild:[52]

    The global review will assess the bank's current values, principles and standards of operation and determine to what extent those need to change; test how well current decision-making processes incorporate the bank's values, standards and principles and outline any changes required; and determine whether or not the appropriate training, development, incentives and disciplinary processes are in place.[53]

The opening words of the terms of reference of this are: "The culture of the banking industry overall, and that of Barclays within it, needs to evolve.[54] Not only Barclays has recognised the need for a change in culture. Stephen Hester, Chief Executive of RBS, stated that "At RBS we have our share of problems to correct from the past and just as we are working hard at putting our financial weaknesses behind us, so too must we cement cultural change."[55]

34. The actions that have so far been discovered of Barclays and other traders were disgraceful. As the FSA's Final Notice states, the attempted manipulation of LIBOR "created the risk that the integrity of LIBOR and EURIBOR would be called into question and that confidence in or the stability of the UK financial system would be threatened". This attempted manipulation of LIBOR should not be dismissed as being only the behaviour of a small group of rogue traders. There was something deeply wrong with the culture of Barclays. Such behaviour would only be possible if the management of the bank turned a blind eye to the culture of the trading floor. The incentives and control systems of Barclays were so defective that they incentivised traders to benefit their own book irrespective of the impact on shareholders and the bank's overall performance. Now exposed, their actions are to the detriment of Barclays' reputation and the reputation of the industry. The standards and culture of Barclays, and banking more widely, are in a poor state. Urgent reform, by both regulators and banks, is needed to prevent such misconduct flourishing.

The failure of internal controls

35. We asked why this wrong-doing by traders had not been caught earlier. Although the Final Notice included references by traders to the need to keep their actions secret,[56] other, more blatant, behaviour was also detected. For instance, the FSA report noted, and Lord Turner referred in oral evidence to, the fact that "At least one Derivatives Trader at Barclays would shout across the euro Swaps Desk to confirm that other traders had no conflicting preference prior to making a request to the Submitters".[57]

36. Mr Diamond confirmed that desk supervisors would have known that this type of behaviour was wrong.[58] He also confirmed that it was their responsibility to report such behaviour to their supervisors and compliance, but that this had not happened.[59] Mr Agius provided the following detail on the compliance function at Barclays following his appearance:

    Compliance functions in the investment bank and across Barclays have dual reporting lines, both within the business and to the Group Head of Compliance.

    The Group Head of Compliance reports to our Group General Counsel, who in turn reports directly to the Chief Executive.

    The Chief Executive and Finance Director are the two executive directors on the Board.

    The Group Head of Compliance provides regular Compliance reports to the Group Governance and Control Committee, the Board Audit Committee and the Executive Committee.

    There was a failure within the Investment Bank Compliance team to escalate information about the LIBOR-related issues either within the business or to the Group Head of Compliance.[60]

Having needed "notice" for some of our questions when he appeared before us,[61] and therefore having checked the facts, Mr Agius told us that Barclays had added a compliance presence on the trading floor during mid-2009.[62] Mr Agius provided the following explanation as to why Barclays had not thought of LIBOR as a risk prior to the investigation:

    In any bank, as well as the people who do the business, you have people who control and manage what is called the compliance function. The compliance function is there to ensure that the bank acts at all times within the regulatory constraints under which it is due to operate. It is not a practical proposition that every single individual is monitored at every single minute of his or her working day. That is simply not practical. What happens is that compliance is constructed around areas where risk is perceived to lie, and the riskier the area of the bank or the activity, the greater the levels of compliance and oversight.

    For many years, the activities of the LIBOR market were seen to be low­risk because the passage of the LIBOR rate was very constant, the spreads were very narrow and very little happened. Separately, because of the way the LIBOR rate is struck—with 16 banks submitting, the top four taken off, the bottom four taken off and an average taken—the chances of anybody manipulating the rate successfully were deemed to be very low. As we heard yesterday from other testimony, as the credit crisis occurred, the behaviour of LIBOR departed from its historic patterns and, evidently, that led to an opportunity for risk and for people to take advantage of that.

    We should have changed our compliance in recognition of that. We were behind the curve and that is most unfortunate, but it explains why these things were allowed to happen, why they were not detected and why more attention was not brought to our level at an earlier stage. It does not excuse any of it, but I seek to give an explanation as to what happened.[63]

37. However, in its Final Notice, the FSA noted that on 12 September 2007 an email from a manager raised questions with Barclays' Compliance in relation to Barclays' obligations and LIBOR setting.[64] That email specifically referred to interest rate derivative contracts, and the Barclays' manager stated that "Although there are contracts that reset everyday, Monday is particularly important as all of the 3 month futures contracts fix".[65] Despite this email, Compliance at Barclays failed to take any action. The FSA Final Notice recorded that:

    Compliance agreed to draft a policy and some procedures which would ensure that Barclays' Submitters were not aware of the firm's overall exposure to LIBOR. After considering the issue further, Compliance concluded there was no risk of the Submitters becoming aware of the firm's overall exposure to LIBOR. Compliance considered at that time whether any information barriers between Barclays' Submitters and any other area of the bank were required.

    Compliance concluded that no such information barriers were necessary, even though there was a potential conflict of interest between Barclays' Submitters and its Derivatives Traders. However, Compliance did not query the reference to derivatives contracts in Manager E's email on 12 September 2007. No questions were asked of Manager E or the Submitters in relation to this issue, no action was taken by Compliance and no systems and controls were put in place to deal with the potential conflict.[66]

38. The attempted manipulation of Barclays' LIBOR submissions with the intention of personal gain continued for four years. It is shocking that it flourished for so long. Any system may fail for a short period, but compliance at Barclays was persistently ineffective. Even when Barclays' compliance had indications that something was awry, it failed to take the opportunity to strengthen the bank's controls. Nor was there any pressure from senior executives within Barclays to ensure that effective LIBOR controls were in place, as it was considered low-risk, in particular where LIBOR setters sat, with no presence of the compliance function. These are serious failures of governance within Barclays, for which the board is responsible. The compliance function within a bank is very important. If it is weak or ignored in the practices of the bank that is reflective of a poor culture which does not take seriously enough abiding by the rules essential to proper functioning of the bank and the wider financial system. The serious failings of the compliance function during the period under examination suggest there was this kind of culture at Barclays.

39. During this period of extremely weak compliance at Barclays, it was nonetheless subject to extensive regulatory oversight by the FSA. Despite the numerous ARROW visits that were conducted by the FSA during this period, we have seen no evidence that this weakness in compliance elaborated in the Final Notice was identified by the FSA in a timely manner, still less, dealt with. The FSA must report to this Committee on how it will alter its supervisory efforts to counter such weak compliance in future.

28   Financial Services Authority, Final Notice, 27 June 2012, para 8 Back

29   Financial Services Authority, Final Notice, 27 June 2012, para 81 Back

30   Financial Services Authority, Final Notice, 27 June 2012, para 48 Back

31   Financial Services Authority, Final Notice, 27 June 2012, para 49. For a more detailed description of how Barclays' traders could have benefitted, please see Financial Services Authority, Final Notice, 27 June 2012, paras 49-51 Back

32   Financial Services Authority, Final Notice, 27 June 2012, para 56 Back

33   Financial Services Authority, Final Notice, 27 June 2012, para 164 Back

34   HC (2012-13) 535, Q 78 Back

35   Q 122 Back

36   Q 1024 Back

37   Qq 1110-1111 Back

38   Q 1112 Back

39   Bloomberg, Libor flaws allowed banks to rig rates without conspiracy, 16 July 2012 Back

40   Financial Services Authority, Final Notice, 27 June 2012, para 11 Back

41   Financial Services Authority, Final Notice, 27 June 2012, para 82 Back

42   Financial Services Authority, Final Notice, 27 June 2012, para 84 Back

43   Financial Services Authority, Final Notice, 27 June 2012, paras 88-89 Back

44   Financial Services Authority, Final Notice, 27 June 2012, para 65 Back

45   Financial Services Authority, Final Notice, 27 June 2012, para 83 Back

46   Q 1094 Back

47   Q 137 Back

48   Q 668 Back

49   Q 1094 Back

50   Q 1095 Back

51   Barclays PLC, Anthony Salz to lead independent business practices review, 24 July 2012 Back

52   Barclays PLC, Anthony Salz to lead independent business practices review, 24 July 2012 Back

53   Barclays PLC, Anthony Salz to lead independent business practices review, 24 July 2012 Back

54   Barclays PLC, The Salz Review of Barclays Business Practices - Terms of Reference, 24 July 2012 Back

55   Daily Mirror, 'You are right to be angry with banks, but none of us can afford to give up on them': Stephen Hester's message to readers on banking crisis, 3 July 2012 Back

56   For example, Financial Services Authority, Final Notice, 27 June 2012, Para 93  Back

57   Q 1094; Financial Services Authority, Final Notice, 27 June 2012, Para 54 Back

58   Q 154 Back

59   Q 158 Back

60   Letter from Marcus Agius to the Chairman of the Treasury Committee, 20 July 2012 Back

61   Qq 799, 801-802 Back

62   Letter from Marcus Agius to the Chairman of the Treasury Committee, 20 July 2012 Back

63   Q 648 Back

64   Financial Services Authority, Final Notice, 27 June 2012, Para 165 Back

65   Financial Services Authority, Final Notice, 27 June 2012, Para 165 Back

66   Financial Services Authority, Final Notice, 27 June 2012, Paras 166-167 Back

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© Parliamentary copyright 2012
Prepared 18 August 2012