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]
COLLUSION WITH TRADERS AT OTHER BANKS
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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