Not for the first time—and probably not for the last—U.K. bank Barclays has had to fork out an eye-watering sum to settle claims over its deliberate manipulation of one of world’s largest financial benchmarks.

On August 8, Barclays reached a U.S.$100m settlement with 43 U.S. states and the District of Columbia for fraudulent and anticompetitive conduct in relation to its part in rigging LIBOR, the key benchmark for determining the rate at which banks around the world lend to one another, as well as deciding short-term interest rates.

Barclays is the “first of several banks” involved in setting the U.S. dollar LIBOR to resolve investigations with attorney generals across the United States.

New York Attorney General Eric Schneiderman—who was instrumental in orchestrating the agreement—said government entities and not-for-profit organisations were defrauded of funds because they did not know Barclays and other financial firms were manipulating the rate, which is used to price an estimated U.S. $350tn of financial products.

“There has to be one set of rules for everyone, no matter how rich or how powerful, and that includes big banks and other financial institutions that engage in fraud or impair the fair functioning of financial markets,” said Schneiderman. “As a result of Barclays’s misconduct, government entities and not-for-profits were defrauded of funds that otherwise could have been used to benefit the people of New York.”

In a statement, Barclays said it was pleased to have resolved the investigation. “Barclays is pleased to have resolved the state attorneys general’s investigation into Barclays’ legacy LIBOR—and Euribor-related activities. We believe this settlement is in the best interests of our shareholders and clients and allows us to continue to focus on the future and serve our clients.”

The investigation found that from 2007-2009 (at least) Barclays managers told LIBOR submitters to lower their LIBOR settings to avoid the appearance that Barclays was in financial difficulty and needed to pay more than some of its competitors to borrow money. The submitters duly did so.

However, from 2005 “and continuing at least into 2009,” according to Schneiderman, Barclays’ traders asked the bank’s LIBOR submitters to change their LIBOR settings in order to benefit the traders’ positions (instead of setting LIBOR based on Barclays’ borrowing costs). Again, the submitters duly did so. The behaviour was captured in a number of revealing internal communications.

“As a result of Barclays’s misconduct, government entities and not-for-profits were defrauded of funds that otherwise could have been used to benefit the people of New York.”

Eric Schneiderman, Attorney General, New York

In one exchange in December 2007, a Barclays employee involved in submitting rates told his supervisor: “At the same time that we were setting at 5.30% I was paying 5.40% ... in the market. Given a free hand I would have set at around 5.45% ... My worry is that we [both Barclays and the contributor bank panel] are being seen to be contributing patently false rates. We are therefore being dishonest by definition and are at risk of damaging our reputation in the market and with the regulators.”

Some e-mails revealed plainly corrupt behaviour, and how they escaped being picked up is a mystery. For example, on March 13, 2006, a Barclays trader asked a Barclays USD LIBOR submitter to change the rate to improve the bank’s trading position. The submitter responded: “I am going 90 altho[ugh] 91 is what I should be posting.” The trader replied in part: “When I retire and write a book about this business your name will be written in golden letters … And you’ll have an open invitation to my bar in the Greek Islands he he.” The submitter replied: “I would prefer this not [to] be in any books!”

Other e-mails also confirmed suspicions that the bank was acting dishonestly—and that others in the group of 16 contributing panel banks were doing the same. On Sept. 4, 2007, a Barclays Sterling LIBOR submitter told a Barclays manager: “The Libor fixings put in by banks suggest they are either deluded or not obeying the rules—this needs to be evaluated, reinforced, and/or changed. Trying to hide the facts does nobody any good.” On Dec. 4, 2007, one Barclays USD LIBOR submitter bluntly told one of the bank’s traders that “I’m patently giving a false rate.”

But of particular interest in the settlement agreement is the fact that Barclays wasn’t hiding its LIBOR manipulation from the regulators: In fact, the bank actually e-mailed the Fed and the European Central Bank (ECB) about manipulation of the benchmark on several occasions.

Between November 2007 and October 2008, some Barclays employees raised concerns with individuals at the British Bankers Association (BBA), which administered the benchmark at that time), the Financial Services Authority (FSA—the U.K.’s former City regulator), the Bank of England, and the Federal Reserve Bank of New York about the diminished level of liquidity available in the market, as well as their views that published U.S. dollar LIBOR fixes were too low and did not accurately reflect the market. In some of those communications, Barclays employees advised that all of the contributor panel banks—including Barclays—were making submissions that were too low.


Below is an excerpt from the Financial Conduct Authority’s thematic review.
Why did we carry out this thematic review?
Robust financial benchmarks play a significant role in the global economy and impact a multitude of financial instruments and contracts used by companies, governments and consumers.
We carried out this thematic review between August 2014 and June 2015 to get an early assessment of the extent to which firms had learnt the lessons from previous failures around benchmark activities and taken appropriate action in response.  
Who should read this?
This report will be of interest to all users of benchmarks and especially those firms that engage in activities related to benchmarks, namely firms that are benchmark submitters, administrators or data providers. It will also be of interest to those who trade in underlying instruments that could affect a benchmark.
What are our findings?
Our review suggests that, although firms have made a number of positive changes to improve their governance and controls around benchmark activities, significant further work is needed to ensure that all of the risks are managed appropriately. It is essential that firms’ senior management pay heed to the findings and messages outlined here, and take the steps necessary to identify and resolve any outstanding issues.
What are the next steps?
We expect all firms to identify, manage and control the risks arising from their benchmark activities, put in place appropriate oversight and controls, and instil a culture in which market integrity and consumers interests are at the heart of how they run their businesses.
We have provided feedback to each of the firms involved in our review. Where we have identified shortcomings, we expect improvements to be made. We will follow up on this work as part of our supervision of benchmark activities.
Source: Financial Conduct Authority

Even as early as Sept. 26, 2007 a Barclays Euribor submitter sent an e-mail to a large distribution list—which included an employee at the Federal Reserve Bank of New York, a representative at the European Central Bank, and a World Bank employee—that set out concerns that the benchmark was being rigged. “Our feeling is that LIBORs are again becoming rather unrealistic and do not reflect the true cost of borrowing,” quoted the e-mail.

Over a year later—and with still no direct intervention from any regulator taking place—a Barclays USD LIBOR submitter told a Federal Reserve Bank of New York employee in an Oct. 24, 2008 e-mail that the rate did not reflect reality and that LIBOR merely indicated the rate at which banks do not lend to one another—rather than lend. The submitter wrote: “Recently you’ve had certain banks who I know have been paying 25 basis points over where they’ve set their LIBORs … just the other day there was one bank who was paying 3.75, he sets his LIBOR at 3.70.”

The first sign of any action came in October 2008 as the financial crisis deepened and banks’ liquidity came under increased scrutiny and suspicion. A senior Bank of England official contacted a senior Barclays manager to ask why Barclays’ LIBOR submissions were high compared to other contributor panel banks.

However, the BoE’s intervention may have unintentionally exacerbated the problem. Some Barclays managers took the view that they had been instructed by the BoE to lower Barclays’ LIBOR submissions. Managers then gave the order to USD LIBOR and Sterling LIBOR submitters to lower submissions to stay “within the pack” of what other contributor panel banks’ were offering, even though this meant that the bank was submitting rates that were artificially lower than where its submitters believed Barclays could obtain funds—an action that was “contrary to the BBA definition of LIBOR,” says the document.

The August settlement is just the latest development in a series of investigations by global authorities into interest-rate rigging. In 2012, Barclays was the first bank to settle with the U.S. Justice Department, the U.S. Commodity Futures Trading Commission, and the U.K.’s Financial Services Authority (now the FCA) over LIBOR-rigging, paying fines of £290m. Barclays later paid a U.S.$60m penalty for not respecting an agreement it signed with U.S. and U.K. authorities to avoid prosecution for LIBOR-rigging. It was also hit with a £26m penalty in 2014 over its failings with regard to fixing the gold benchmark.

That same year, Barclays became the first global bank to reach a settlement with investors over its alleged role in the rate-rigging scandal, agreeing to pay just under U.S.$20m to settle a class-action lawsuit filed on behalf of several investors including German fund group Metzler Investment and two hedge funds run by Austrian fund company FTC Capital.

More recently, a judge at Southwark Crown Court in London jailed four former Barclays bankers for conspiring to manipulate LIBOR. Their convictions followed that of former UBS and Citigroup trader Tom Hayes, who is serving an 11-year sentence for the same crime.

Further settlements are expected between U.S. authorities and other global banks involved in the rate-rigging scandal. Brian Frosh, the Maryland attorney general who participated in the working group, says the settlement is “the first, but certainly not the last, with major international financial institutions that manipulated interest rate benchmarks for their own gain.”

In fact, it isn’t even the last settlement that Barclays faces. A look at its latest annual report lists a series of potential civil and regulatory enforcement actions that the bank faces in the United States, United Kingdom, and worldwide for LIBOR and other benchmark manipulation-related cases.

Perhaps worse still, banks’ oversight of their benchmark risks is still likely to be poor. At the end of July 2015, the Financial Conduct Authority (FCA) published its thematic review of oversight and controls of financial benchmarks (since August 2015 the FCA has become responsible for regulating eight of the world’s biggest benchmarks, including the key ones for foreign exchange, gold, silver, and crude oil). It found that firms were still not doing enough to implement controls to manage benchmark risks and that the progress being made across the industry was “slow” and “uneven.” For example, the regulator found that “some firms were still not able to identify all the benchmarks they administered, submitted data to, or published.”

Furthermore, most firms still had not taken appropriate steps to identify and then manage potential conflicts that might lead to benchmark manipulation. The FCA found that while awareness and understanding of conflicts varied between firms, it also found evidence that awareness of potential conflicts of interest varied within firms between desks, as well as between desk heads and traders/brokers on the same desk.

The review also found that a number of firms “displayed deficiencies” in their governance framework around benchmark activities, as they neither had relevant oversight functions, clearly defined roles, and responsibilities for either the first or second lines of defence, nor adequate monitoring and surveillance in place.

Even in those firms where the regulator found evidence that senior management “broadly appeared to be engaged in communicating lessons learnt, and initiating and instilling a cultural change within the firm,” generally the regulator found that “it was not always evident that the message had penetrated down to desk level.”

Lisa Toth, head of global regulation and risk at Hatstand, a London-based global financial consultancy and capital markets specialist, notes that the Barclays LIBOR-rigging problem extends beyond a single bank, and represents a larger failure in internal and external financial markets oversight.

“There were 16 banks in total that were investigated for LIBOR rigging post-recession,” Toth says. “News started to hit in 2012 with big fines being levied against these banks, but this practice went on for years. This begs the question: Who was asleep at the switch? The individual bank’s trading supervisors? They should have been reviewing their staff’s e-mails and chats and reported this manipulation. The compliance professionals? They are responsible for watching the supervisors. The regulators? They are accountable for watching compliance professionals and supervisors. Whether it was banking employees’ ignorance or negligence, regulators are sending a clear and strong message—bankers and compliance professionals will be held personally liable for their actions, facing possible fines and jail time, if they grossly misuse their power and trust.”

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