Record Fines Have Not Calmed Currency-Rigging Fears

Money

As early as 2008, rumors were swirling that some banks — including Barclays (NYSE:BCS), UBS (NYSE:UBS), and the Royal Bank of Scotland (NYSE:RBS) — might have understated the borrowing costs they reported for the London Interbank Offered Rate, or Libor, during the 2008 credit credit crunch, a move that could have mislead the world about the financial positions of those banks. Later that year, the International Monetary Fund made a similar supposition its regular Global Financial Stability Review. But it was not until 2012 that the United Kingdom’s Serious Fraud Office and the United States Department of Justice opened a criminal investigation into the manipulation of interest rates.

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Libor is used as the benchmark for pricing financial products from home loans to credit cards worth over $300 trillion. The interest rates are estimated by leading banks in London and used in the U.S. derivatives markets as well.

Just this week, Bloomberg reported that traders at some of the world’s largest banks have been rigging foreign-exchange benchmarks, such as Libor and WM/Reuters, for more than a decade. This revelation comes at a time when the European Union’s executive body, the European Commission, is considering whether to move oversight of Libor away from the U.K. to a Paris-based regulator. After the Bloomberg revelation, European Union officials said the Britain should investigate the manipulation of currency rates.

“They need to get to the bottom of it,” Sharon Bowles, chairwoman of the European Parliament’s economic and monetary affairs committee, said in an interview with the publication. “It’s quite upsetting we have got another bad news story. It’s time we managed to restore the reputation of our banks.” Similarly, a source told Bloomberg that the U.K. Financial Conduct Authority, which was created in April to regulate markets and prosecute financial crime, is examining potential manipulation of the $4.7 trillion-per-day foreign-exchange market.

However, tensions between Britain and the EU regarding oversight of the financial industry have only grown worse after UBS, RBS, and Barclays were fined a total of $2.5 billion for rigging Libor.

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EU regulators will be fleshing out a proposal this summer on the “framework for benchmarks” such as WM/Reuters and Libor, as Chantal Hughes, a spokeswoman for the EU financial-services chief Michel Barnier, told Bloomberg. The EU proposed making manipulation of financial benchmarks a crime last year.

In the United States, Democratic Senator Carl Levin of Michigan, who chairs the Senate Permanent Subcommittee on investigations said in June 12 email to the publication that the U.S. Department of the Treasury should “reconsider its ill-advised exemption” of foreign-exchange rates from the 2010 Dodd-Frank Act.

Britain’s FCA has already begun working with global regulatory bodies to scrutinize the integrity of benchmarks, including those used to value derivatives and commodities.

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“Regulators have an important role maintaining confidence and integrity in markets, and should rapidly act on any suggestion that untoward things are happening,” Paul Myners, a Labour Party member of Parliament’s House of Lords and financial-services minister from 2008 to 2010, told Bloomberg. “It is vital that the FCA show that it’s willing to be much more aggressive than their predecessor. This will be their first test.”

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