The Financial Services Authority (FSA) has fined The Royal Bank of Scotland plc (RBS) £87.5 million for misconduct relating to the London Interbank Offered Rate (LIBOR).
RBS’ breaches of the FSA’s requirements encompassed a number of issues, involved a number of employees and occurred over a number of years. The individuals involved in the misconduct were located in the UK, Japan, Singapore, and the US. Between January 2006 and November 2010 the misconduct included:
- RBS making Japanese yen (JPY) and Swiss franc (CHF) LIBOR submissions that took into account its derivatives trading positions.
- RBS allowing derivatives traders to act as substitute submitters and make JPY LIBOR submissions that took into account its derivatives trading positions.
- RBS making JPY, CHF and US dollar (USD) LIBOR submissions that took into account the profit and loss (P&L) of its money market trading books.
- RBS derivatives traders colluding with other LIBOR panel banks and interdealer broker firms to influence the JPY LIBOR submissions made by other panel banks, including one derivatives trader entering into “wash trades” (i.e. risk free trades that cancelled each other out and for which there was no legitimate commercial rationale) in order to make corrupt brokerage payments to one broker firm to garner influence. The derivatives trader used this influence to get the broker firm to try to change other panel banks’ JPY LIBOR submissions.
- RBS derivatives and money market traders colluding with individuals at other panel banks and interdealer broker firms who sought to influence RBS’ JPY and CHF LIBOR submissions.
The misconduct was widespread. At least 219 requests for inappropriate submissions were documented – an unquantifiable number of oral requests, which by their nature would not be documented, were also made. At least 21 individuals including derivatives and money market traders and at least one manager were involved in the inappropriate conduct.
RBS failed to identify and manage the risks of inappropriate submissions. RBS established a business model that sat derivatives traders next to LIBOR submitters and encouraged the two groups to communicate without restriction despite the obvious risk that derivatives traders would seek to influence RBS’ LIBOR submissions. It also allowed derivatives traders to act as substitute LIBOR submitters which created an obvious risk that derivatives traders would make submissions that took into account their trading positions. RBS also failed to identify and manage the risk that money market traders would take the P&L of their money market books into account when making RBS’ LIBOR submissions.
RBS did not have any LIBOR-related systems and controls in place until March 2011, failed to adequately address the risk that derivatives traders would seek to influence RBS’s LIBOR submissions until June 2011, and failed to adequately address the risk that money market traders would take into account the impact of LIBOR on the profitability of transactions in their money market books, until March 2012.
In response to a specific request by the FSA as a result of its enquiries into LIBOR, RBS attested to the FSA in March 2011 that its LIBOR related systems and controls were adequate. This was inaccurate as RBS’ systems and controls were inadequate. Although it had reviewed its LIBOR submission process in February and March 2011 at the FSA’s instigation RBS had failed to identify the risks that submitters would make LIBOR submissions that took into account derivative trader requests and the impact on the profitability of transactions in their money market books.
From January 2005 through to March 2012, RBS also failed to have adequate transaction monitoring systems and controls that would have assisted it to detect wash trades.
Tracey McDermott, director of enforcement and financial crime, said:
“The integrity of benchmark reference rates such as LIBOR is of fundamental importance to both UK and international financial markets. The findings set out in our notice today demonstrate a failure by RBS to take that wider context into account.
“The failures at RBS were all the more serious because of the attempts not only to influence the submissions of RBS but also of other panel banks and the use of interdealer brokers to do this.
“During the course of the FSA's work on LIBOR, RBS provided the FSA with an attestation that its LIBOR related systems and controls were adequate. This was not correct. Primary responsibility for the conduct of the individuals within firms and the efficacy of the controls that are in place, rests with those firms. The FSA takes it very seriously when firms tell us that they have appropriate systems but do not.
“The extent and nature of the misconduct relating to LIBOR has cast a shadow on the reputation of this industry and we expect firms to take steps to ensure that this can never happen again. This is the third penalty we have imposed in relation to LIBOR related misconduct. The size and scale of our continuing investigations remains significant.”
The FSA continues to pursue a number of other significant cross-border investigations in relation to LIBOR and other benchmark rates.
RBS agreed to settle at an early stage of the investigation and therefore qualified for a 30% discount under the FSA’s settlement discount scheme. Without the discount the fine would have been £125 million.
This was a significant cross-border investigation and, in particular, the FSA would like to thank the US Commodity Futures Trading Commission (CFTC), the US Department of Justice (DoJ) together with the Federal Bureau of Investigation (FBI), the Monetary Authority of Singapore (MAS) and the Japanese Financial Services Authority (JFSA) for their co-operation.
Notes for editors
- The Final Notice for RBS
- 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’, 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.
- The LIBOR benchmark reference rate indicates the interest rate that banks charge when lending to each other. It is fundamental to the operation of both UK and international financial markets, including markets in interest rate derivatives contracts.
- LIBOR is 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 also affect payments made under a wide range of other contracts including loans and mortgages. The integrity of benchmark reference rates such as LIBOR is therefore of fundamental importance to both UK and international financial markets.
- LIBOR is 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 short term interest rate contracts traded on LIFFE in London in 2011 was 477 trillion euro.
- LIBOR is published on behalf of the British Bankers’ Association (BBA). There are different panels of banks that contribute submissions for each currency in which LIBOR is published. 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.
- The direct impact of actual manipulation of the LIBOR 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 as required by the Financial Services Act 2012.