European Commission Lays Down the Law: 8 Banks Receive Record Fine

source: http://www.flickr.com/photos/alfmelin/

source: http://www.flickr.com/photos/alfmelin/

On Wednesday, the European Commission announced that it has fined eight international financial institutions a total of 1.7 billion euros ($2.31 billion) for illegally colluding on benchmark interest rates in the European Economic Area. The total fine is the largest ever issued by the Commission, and could still be just the tip of the iceberg as far as penalties are concerned. European accords usually leave the door open for civil liability, and in July, Morgan Stanley (which is not involved in these probes) estimated that as many as 23 banks could face upwards of $22 billion in penalties and damages between them.

The Commission’s report details two separate financial cartels: one involved in euro-denominated interest rate derivatives (EIRD), and one involved in yen-denominated interest rate derivatives (YIRD).

Broadly speaking, the derivatives in question were used to hedge against interest rate fluctuations. The Commission explains that the products “are traded worldwide and play a key role in the global economy” and “derive their value from the level of a benchmark interest rate, such as the London interbank offered rate (LIBOR) — which is used for various currencies including the Japanese yen (JPY) — or the Euro Interbank Offered Rate (EURIBOR), for the euro.”

Four banks settled over participation in the EIRD cartel between September 2005 and 2008: Barclays (NYSE:BCS), Deutsche Bank (NYSE:DB), Royal Bank of Scotland (NYSE:RBS), and Société Générale.

“The cartel aimed at distorting the normal course of pricing components for these derivatives,” reports the Commission. “Traders of different banks discussed their bank’s submissions for the calculation of the EURIBOR as well as their trading and pricing strategies.”

Barclays avoided a fine by being the first to reveal the existence of the cartel to regulators. Otherwise, it would have faced a fine of around 690 million euros ($937.6 million), according to the Commission. Other banks received reductions to their fines for cooperation. Barclays was previously fined $453 million to settle separate allegations of interest-rate manipulation filed by by U.S. and UK authorities.

Participants Duration of Participation Reduction under the Leniency Notice Fine
Barclays 32 months 100% 0
Deutsche Bank 32 months 30% 465,861,000 euros ($633,012,339)
Société Générale 26 months 5% 445,884,000 euros ($605,867,573)
RBS 8 months 50% 131,004,000 euros ($178,008,351)

Six banks settled over participation in the YIRD cartel between 2007 and 2010: UBS (NYSE:UBS), RBS, Deutsche Bank, Citigroup (NYSE:C), JPMorgan (NYSE:JPM), and a brokerage firm called RP Martin.

“The collusion included discussions between traders of the participating banks on certain JPY LIBOR submissions,” reports the Commission. “The traders involved also exchanged, on occasions, commercially sensitive information relating either to trading positions or to future JPY LIBOR submissions (and in one of the infringements relating to certain future submissions for the Euroyen TIBOR – Tokyo interbank offered rate).” UBS had all of its fines reduced to zero, while Citigroup had one fine eliminated for cooperation.

Participant Duration of participation per infringement(NYSE:S) Reduction under the Leniency Notice (%) Fine (€)
UBS (5 infringements) 1 month, 8 months, 5 months, 10 months, 1 month 100% for all infringements 0
RBS (3 infringements) 8 months, 5 months, 3 months 25% for one infringement 260,056,000 euros ($353,364,323)
Deutsche Bank (2 infringements) 10 months, 2 months 35%, 30% 259,499,000 euros ($352,607,470)
JPMorgan (1 infringement) 1 month 79,897,000 euros ($108,564,114)
Citigroup (3 infringements) 1 month, 2 months, 3 months 35%, 100%, 40% 70,020,000 euros ($95,143,238)
RP Martin (1 infringement) 1 month 25% 247,000 euros ($335,623)

 

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