UBS fine over rate setting sheds light on growing market fraud (update)

UBS New York headquarters

Update 22:00  ZURICH, SWITZERLAND – UBS, Switzerland’s largest bank, will have yet another large loss on its books, $1.5 billion in fines announced late 18 December, payable to US, UK and Swiss regulatory bodies, for its part in Libor rate-fixing between 2006 and 2010.

US regulators will be paid $1.2b by the bank, which was the first of the banks  under investigation to go public with the information.

The Britsh FSA (UK Financial Services Authority) handed out its largest ever fine, £160 million, to UBS saying that its breaches of the FSA’s requirements “encompassed a number of issues, involved a significant number of employees and occurred over a period of years in a number of countries.”

But the damage risks going far deeper than a fine, and NZZ, Switzerland’s main newspaper, in Zurich, suggest that the affair will have an impact on the bank’s credit rating. The Economist, for its part, enjoyed the e-mail exchanges between UBS staff, published by the regulatory bodies today, leaving the UBS image in tatters.

Switzerland’s Finma, the bank regulatory body, announced that it is fining UBS CHF59 million as its investigation closes. “Finma has established that UBS seriously violated Swiss financial market legislation and ordered measures to be taken to improve the processes involved. Finma has also ordered UBS to disgorge CHF59 million in profits to the Swiss Confederation.”

Both regulatory bodies were damning in their reports. The US Securities and Exchange Commission, Commodity Futures Trading Commission (CFTC) and the US Department of Justice are expected to comment later today.

Finma notes that:

“Substantial failings in the system and control processes for Libor submissions at UBS prevented the improper interference with interest rates from being discovered and the bank from reacting appropriately. Internal guidelines, if they at all existed, were either deficient or not implemented consistently. Moreover, the responsible line managers did not sufficiently control the submission process, neither did internal audits conducted by the Compliance department and Internal Audit uncover the misconduct.”

The British FSA provides a detailed account of the bank’s operations, starting with this:

“The misconduct was extensive and widespread.  At least 2,000 requests for inappropriate submissions were documented – an unquantifiable number of oral requests, which by their nature would not be documented, were also made. Manipulation was also discussed in internal open chat forums and group emails, and was widely known.  At least 45 individuals including traders, managers and senior managers were involved in, or aware of, the practice of attempting to influence submissions.  The routine and widespread manipulation of the submissions was not detected by Compliance or by Group Internal Audit, which undertook five audits of the relevant business area during the relevant period.”

Barclay’s was fined £59.5 million in June in relation to the Libor fixing scandal, which probably dates back to 2008, when Barclay’s reported suspicions of other banks’ too-low interest rates.

Reuters 19 December published a timeline of the unfolding scandal, with seven banks under investigation, HSBC, Royal Bank of Scotland, JPMorgan, Deutsche Bank, Barclays, UBS and Citigroup.

The Financial Time reports that the latest information from Britains FSA hints at “the role of interdealer brokers in the burgeoning scandal, alleging that employees at these institutions actively ‘colluded’ with rate-fixing efforts – and were handsomely rewarded for it.” The article warns that the scandal appears likely to spread further.

Libor stands for the London Interbank Offered Rate and refers to the interest rate for unsecured money market loans to prime banks: the amount major banks say they expect to pay to borrow money from other banks.

Each bank business day, specific banks report to the British Bankers’ Association (BBA) the interest rate at which they would be able borrow unsecured funds of a reasonable market size on the London interbank market. The relevant top and bottom-quartile interest rates are disregarded when fixing the Libor. An average is calculated on the basis of the remaining interest rates, and the figure obtained in this manner is fixed and published as the Libor for the day in question. Libor rates are fixed in different currencies and with varying maturities. (definition: Swiss National Bank)