Traders being investigated by U.K. regulators for the suspected rigging of global interest rates are unlikely to face criminal charges while their firms may suffer record fines, people with knowledge of the probe said.
Britain’s Financial Services Authority is scrutinizing evidence of attempted market abuse as well as failures in banks’ systems and controls, which carry civil penalties, said the people, who declined to be identified because the inquiry is private. To file criminal charges in England, the regulator would need to show traders successfully manipulated the rate.
The FSA is among regulators looking into whether banks tried to manipulate the London interbank offered rate, the benchmark rate for $360 trillion of securities, to hide their true cost of borrowing, and whether traders colluded to rig the benchmark to profit from interest-rate derivatives.
“The FSA’s enforcement mantra is ‘credible deterrence,’ which has increasingly involved the FSA taking criminal proceedings against individuals for market abuse,” said Owen Watkins, a financial services lawyer at Lewis Silkin LLP in London. “Given the size of the fines it is intending to levy against the firms involved, the FSA feels that civil action against the individuals is sufficient to achieve the required deterrent effect.”
Royal Bank of Scotland Group Plc, Citigroup Inc., UBS AG, ICAP Plc, Lloyds Banking Group Plc (LLOY) and Deutsche Bank AG are among firms that are being probed by regulators worldwide. Spokesmen for UBS, RBS, ICAP, Deutsche Bank and Lloyds declined to comment, while those for Citigroup didn’t immediately return calls. Joseph Eyre, an FSA spokesman, declined to comment.
EU, Canadian Probes
The European Union, Canadian and U.S. antitrust regulators as well as the Swiss Competition Commission are probing whether firms acted anti-competitively. The U.S. Department of Justice is running a criminal investigation, according to court documents. Alisa Finelli, a Justice Department spokeswoman, declined to comment on the status of its probe.
The FSA expects to levy record fines on some of the 12 banks under investigation by the year-end, one of the people said. The FSA initially expected it wouldn’t impose penalties before Christmas because of the case’s complexity. Firms have been cooperating to end the probe early, the people said.
The FSA may seek to levy fines as large as those issued by its U.S. counterparts, one of the people said. The FSA’s fines have historically been exceeded by those levied by U.S. regulators. The FSA’s biggest fine to date is the 33 million- pound ($51 million) penalty it imposed on a unit of JPMorgan Chase & Co. in 2010 over a failure to segregate client money.
No FSA Immunity
The U.K. regulator hasn’t granted immunity to any firms or individual traders, and those who cooperate would be entitled to receive the regulator’s standard 30 percent discount on fines for settling early, one of the people said.
Under its civil powers, the FSA can ban people from working in the financial industry for life or impose fines of millions of pounds, Watkins said.
Regulators are interviewing traders at the FSA office in London’s Canary Wharf district and further meetings are planned as soon as this month, four people said. Investigators from the U.S. Securities and Exchange Commission and Commodities Futures Trading Commission have been present at some interviews, four people said. John Nester of the SEC and Steve Adamske, a CFTC spokesman, declined to comment.
One trader interviewed was warned to expect a fine or lifetime ban if found to have attempted to influence the rate, according to his lawyer who declined to be identified. Three other lawyers involved in the case said they are concerned U.S. authorities may seek to extradite British traders if they file criminal charges, and the FSA hasn’t raised the issue with them. They declined to be identified because the talks are private.
Libor is derived from a survey of banks conducted each day on behalf of the British Bankers’ Association in London. Lenders are asked how much it would cost them to borrow from each other for 15 different periods, from overnight to one year, in currencies including dollars, euros, yen and Swiss francs. After a set number of quotes are excluded, those remaining are averaged and published for each currency by the BBA before noon.
Three-month dollar Libor was unchanged at 0.468 percent today, according to the BBA. The comparable rate in euros also held steady at 0.577 percent.
Employees responsible for Libor submissions have said in interviews with Bloomberg they regularly discussed where to set the measure with traders sitting near them, interdealer brokers and counterparts at rival banks. The talks became common practice after money markets froze in 2007, they said, making it difficult for individual bankers to gauge the cost of borrowing from other lenders.
Regulators are focusing on the lack of so-called Chinese walls between traders and employees making interest-rate submissions on behalf of their banks, and whether the banks’ proprietary trading desks exploited the information they had about the direction of Libor to trade interest-rate derivatives.
The firms are seeking to reach a joint settlement with regulators in the U.K. and U.S. under which they would pay fines to end the investigation, one of the people said. That may be difficult to reach because the regulator requires banks in the U.K. to admit guilt in a settlement, something that could expose them to class-action lawsuits in the U.S., the person said. The settlement wouldn’t include antitrust authorities.