Barclays And The Libor Scandal Pdf

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Libor scandal

To browse Academia. Skip to main content. By using our site, you agree to our collection of information through the use of cookies. To learn more, view our Privacy Policy. Log In Sign Up. Download Free PDF. Surya Kalyan. Download PDF. A short summary of this paper. Unscrupulous traders and managers in some of the largest banks around the world deliberately and systematically manipulated borrowing rates.

This paper describes the LIBOR scandal and argues that it is an example of systemic operational risk, in particular people risk. The explosive growth over the past twenty-five years in the use of interest rate swaps IRSs and the process of resetting rates on IRSs, which ultimately led to the unethical manipulation of the underlying LIBOR rates, is then described.

The transcripts of con- versations unearthed by these investigations show rampant illicit activities that were apparently a normal part of doing business, as traders, LIBOR submitters and brokers colluded to manipulate LIBOR for their own interests. Finally, the paper makes some suggestions as to how the management of systemic operational risks may be addressed by banks and regulators.

Unfortunately, this scandal is just the latest in a series of unsavory practices that have surfaced following the global financial crisis GFC. McConnell Services Authority FSA , found that manipulation was not limited to just managers and traders in Barclays, but had occurred many times over many years in other banks.

It is a truly global process, involving dozens of individuals in international banks estimating, each day, what they believe interest rates will be over a variety of periods in several currencies. LIBOR has become an indispensable component of the global financial system, embedded in millions of financial contracts.

In its current form, the daily process of fixing LIBOR has been in place since , and despite the scandal described in this paper it is still working, essentially unchanged, although additional accountability and legal sanctions have been introduced as a result of the Wheatley b inquiry. The IRS market is, as described in Section 3, less transparent than the lending market, and, especially in some currencies, there are fewer transactions that can be observed against which rates can be fixed.

Slowly and imperceptibly the nature of the interbank lending market changed, as IRSs grew in popularity, but the mechanism for setting rates did not keep pace.

In many respects, the LIBOR fixing process had become obsolete, but continued nonetheless because it was so widely used and hence would cause too much disruption to change. There is a lesson here for the operational risk community: to always question basic assumptions and processes as to their continued relevance. But, as this paper describes, this trust broke down, resulting in manipulation of rates to the benefit of individuals and firms and to the detriment of borrowers around the world.

It involved more than three dozen traders and submitters located in multiple offices, from London to Zurich to Tokyo, and elsewhere. The misconduct included several UBS managers, who made requests to benefit their trading positions, facilitated the requests of their staff for submissions that benefited their trading positions, or knew that this was a routine practice of the traders and did nothing to stop it.

Section 3 then describes the interest rate markets for which LIBOR has become the predominant benchmark. Section 4 describes the findings of various regulatory investigations that laid bare the illicit market manipulation. Finally, Section 6 argues that the manipulation of LIBOR is an example of systemic operational risk, in particular people risk, and makes recommendations as to how banks and regulators may improve management of people risk at both the firm and systemic levels.

Forum Paper www. McConnell ; Schenk Because offshore Eurodollars deposits did not have regulatory reserve and deposit insurance requirements, they were a cheaper source of funds for international banks. By the s, banks were actively on-lending these deposits to governments and corporations that wished to borrow in Eurodollars, including corporations in the United States.

During the s, the market grew considerably as governments and corporations also began to issue securities in Eurodollars at rates lower than they could borrow locally Schenk This, in turn, gave rise to one of the most innovative financial products of the late twentieth century, the IRS, which allowed borrowers to eliminate such risks while still retaining many of the benefits of borrowing in Eurodollars Corb The spectacular growth of the IRS market in the last twenty-five years is central to understanding the LIBOR scandal and is described in the next section, but it is sufficient to note at this point that by the mid s the market had reached a critical mass and some standardization was needed for the market to continue to grow.

LIBOR technically BBA LIBOR is not a single rate but a set of rates that cover rep- resentative borrowing rates in ten different currencies see Table 1 on page 66 and over fifteen different borrowing periods, also called tenors2 or maturities Wheatley a. LIBOR is widely used but is not unique. However, for this paper, the emphasis will be on LIBOR, because of its dominant position in the inter- national money markets.

These official LIBOR rates are then used by banks as benchmarks not only for lending to customers and each other but also for settlement of contracts, such as maturing interest rate contracts on derivatives exchanges, and, importantly in this context, for setting rates for IRSs Corb This LIBOR process has, because it is used so widely, become an integral and critical component of the international financial system.

It is interesting to note at this point that the individual submissions by contributing banks are made available to the public on the same day Wheatley a.

Paradoxically, this level of trans- parency, normally laudable, was integral to some of the manipulation described in this paper. So why did such a well-established and seemingly transparent process become the subject of widespread manipulation that went undetected for so long?

To answer that question, we must look first at the weaknesses in the process and second at the people involved in the process, especially those who were able and willing to take advantage of those weaknesses.

These are not inconsiderable strengths, especially where many markets, such as for over-the-counter OTC derivatives, lack transparency. For good reason, LIBOR became part of the very fabric of international financial markets, a seemingly stable cornerstone of day-to-day business. But, because the process was so embedded in normal business, and rarely ques- tioned, the inherent weaknesses were more difficult to identify. With admitted hind- sight, some critical deficiencies can be perceived.

It is not an unreasonable question to ask an expert, provided that one believes that the answers given would be objective and unbiased. The question is, however, open to abuse were an unethical person to answer it. This is particularly the case for less well-used currencies and maturities.

But success is infectious; who questions a winner? Structural: related to the organization of the process itself. Bank level: related to the contributing banks. Individual: related to the individuals responsible for submitting rates.

This dominance of UK banks may reflect the fact that LIBOR was originally a UK initiative and, as banks headquartered in London, these banks would have a vested interest in promoting the City as a financial hub. In other words, despite the fact that an independent secretariat in BBA LIBOR can raise issues, oversight and sanctions are controlled by the contributing banks.

In short, the contributing banks were overseeing themselves. This at least raises the possibility that, in the absence of corroborating transactions Wheatley a , the submission of rates could be influenced by trading activity.

In fact, as Section 4. The subjective nature of the LIBOR process, which required submitters to be experts in, and close to, the markets for which they were submitting rates, inevitably meant that submitters would come into contact with traders.

The banks concerned were well aware that conflicts of interest were possible but appeared to take no action to reduce these particular conflict situations. The LIBOR scandal illustrates that banks are placed in situations where there are natural conflicts of interest and are required, usually through their compliance functions, to proactively address such issues. If, for example, a trader were able to influence the direction of the final LIBOR rate for a particular currency and maturity, then they could set rates to the advantage of their existing market positions or take new advantageous positions.

This would, of course, require collusion between submitters and traders to effect such a change. This is precisely what happened in a number of situations, as described later. Such actions, of course, would be, at least, unethical and risk internal sanctions, so the obvious question raised is whether the reward would be worth the risk.

Therefore, even a small change in LIBOR for such enormous positions could produce substantial profits. This conflict of interest for the individual trader was recognized too late, as it was assumed that the LIBOR calculation process, by its very transparency, made such actions unlikely. Unfortunately, that assumption proved to be naive. Before discussing the details of how the LIBOR scandal unfolded, it is worth describing the explosive growth in international interest rate markets that made manip- ulation feasible and, because of the sheer size of the market, also very profitable.

McConnell In the early s, each swap was bespoke, specially tailored, usually by an invest- ment bank, to meet the specific borrowing needs of two corporations or government bodies. Originally, the economic rationale for such swaps was the reality that different borrowers had different comparative advantages in different markets.

For example, a highly regarded US company could borrow more cheaply at home in the United States than in the United Kingdom. However, a US corporation often needed to borrow overseas to expand business, as would an overseas borrower to fund expansion in the United States.

In other words, swaps could take advantage of the arbitrage in different credit markets Whittaker ; Corb And the investment banks that arranged the deals between the borrowers would also benefit from the fees earned. This appears to be a true win—win—win situation. But there are other arbitrage opportunities, in particular where a borrower such as a mortgage bank prefers to borrow at a fixed rate but has income that is tied to a floating rate. As noted above, fairly soon after the first bilateral contracts were created, it became standard practice for swap dealers to act as intermediaries to contracts Crouhy et al Over time, the often complex IRS contracts became standardized through the industry body, the International Swaps and Derivatives Association ISDA , and innovation in the industry created flexibility in the terms of contracts.

Flexibility: contracts can be tailored to the specific requirements of a client, thereby allowing them to better hedge their exposures.

Transactional efficiency: unlike other instruments, such as FRAs, a number of bor- rowing periods can be covered by a single transaction. Costs: as contracts became standardized and the number of swaps dealers expanded, the costs of IRS contracts fell for clients. In addition, IRS costs tend to be lower than other contracts, such as options. Larger markets: for borrowers, the use of currency swaps increases the number of markets where credit is available.

This, of course, increases leverage for speculators in this market Whittaker This, of course, further increases possible leverage. Capital usage: tied in with leverage and netting, the regulatory capital needed to cover an interest rate swap under Basel II regulations is much less than an equivalent loan Basel Committee on Banking Supervision BCBS But IRS contracts are not without risks, in particular: credit risk, such as the default of one of the parties to an IRS contract; market risk changes to market rates, which may make an IRS contract unprofitable for one of the parties; and operational risks, which are described in more detail later.

Although IRSs are the most heavily traded interest rates contracts, there are a number of other related interest rate derivatives, such as swaptions and FRAs, and interest rate options, such as caps, floors and collars.

These derivatives, in combination with IRSs, provide highly tailored, but also potentially very risky, interest rate hedging strategies for corporations and banks Corb The uses, valuation of and risks in IRSs and related derivatives are well documented see, for example, Dubofsky ; Fabozzi ; Mangiero ; Jorion ; Saunders and Allen ; Crouhy et al ; Corb McConnell 3. Broker fees in the swaps market are not disclosed but are typically in the range of one basis point or 0.

Such a business model, relying on volume for profitability, raises the possibility that a broker may act unethically to get a trade done for a valuable customer, and this is exactly what occurred, as Section 4 describes. Typical IRS contracts will specify the frequency often, but not always quarterly on which floating and fixed interest will be paid. Since the profitability of a fixed—floating IRS contract for any period depends 5Note that ISDA rules clearly specify the precise timing should a payment or determination day fall on a nonworking day.

Ongoing Conversations

Abstract In June of , Barclays plc admitted that it had manipulated LIBOR—a benchmark interest rate that was fundamental to the operation of international financial markets and that was the basis for trillions of dollars of financial transactions. In addition, between and the firm had made dishonestly low LIBOR submission rates to dampen market speculation and negative media comments about the firm's viability during the financial crisis. In settling with U. Diamond blamed a small number of employees for the derivative trading related LIBOR rate violations and termed their actions as "reprehensible. This case explains why LIBOR was an essential part of the global financial market, the mechanism used to establish the rate, and what Barclays did wrong. The case allows for an examination of: i the consequences of violating the trust of market participants, ii cultural and leadership flaws at Barclays; iii the challenge of effectively competing in a market where systemic, and widely understood, corruption is taking place, iv the complicity of regulators in perpetuating a corrupt system; v what might, or might not, be effective remedies for the systemic flaws in LIBOR.

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Systemic operational risk: the LIBOR manipulation scandal

Case Study Analysis Solutions. In June , Barclays plc admitted that he had manipulated the London Interbank Offered Rate LIBOR — an interest rate benchmark, which is essential for the functioning of international financial markets and that was the basis for billions of dollars financial transactions. In addition, between and , the Company had dishonestly low bid LIBOR rate to dampen market speculation and negative media comment on the viability of the company during the financial crisis. Adjust with the British and U. This explains why if LIBOR is an essential element of the global financial market, the mechanism used to determine the speed and Barclays wronged.

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In June of , Barclays plc admitted that it had manipulated the London Interbank Offered Rate LIBOR -a benchmark interest rate that was fundamental to the operation of international financial markets and that was the basis for trillions of dollars of financial transactions. In addition, between and , the firm had made dishonestly low LIBOR submission rates to dampen market speculation and negative media comments about the firm's viability during the financial crisis. In settling with U. Diamond blamed a small number of employees for the derivative trading-related LIBOR rate violations and termed their actions as "reprehensible. This case explains why LIBOR was an essential part of the global financial market, the mechanism used to establish the rate, and what Barclays did wrong. The case allows for an examination of: i the consequences of violating the trust of market participants, ii cultural and leadership flaws at Barclays; iii the challenge of effectively competing in a market where systemic, and widely understood, corruption is taking place, iv the complicity of regulators in perpetuating a corrupt system; v what might, or might not, be effective remedies for the systemic flaws in LIBOR.

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Barclays and the LIBOR Scandal

Beginning in , an international investigation into the London Interbank Offered Rate, or Libor, revealed a widespread plot by multiple banks—notably Deutsche Bank, Barclays, UBS, Rabobank, and the Royal Bank of Scotland—to manipulate these interest rates for profit starting as far back as Investigations continue to implicate major institutions, exposing them to lawsuits and shaking trust in the global financial system. Since , authorities in both the UK and the United States have brought criminal charges against individual traders and brokers for their role in manipulating rates, though the success of these prosecutions has been mixed.

Во мне течет цыганская кровь, мы, цыганки, не только рыжеволосые, но еще и очень суеверные. Кольцо, которое отдает умирающий, - дурная примета.

Его безумная поездка вот-вот закончится. Он посмотрел на ее пальцы, но не увидел никакого кольца и перевел взгляд на сумку. Вот где кольцо! - подумал.  - В сумке.

Зато был другой голос, тот, что звал .

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    PDF | On Jan 1, , Seumas Miller published The LIBOR Scandal: Culture, Corruption and Collective Action Barclays, UBS and the Royal Bank of Scotland.