U.K. Probing Alleged ISDAfix Manipulation, Regulator Says

U.K. regulators are investigating alleged manipulation of a benchmark measure tied to interest-rate swaps, the agency’s chief told lawmakers yesterday.

The Financial Conduct Authority is working with the U.S. Commodity Futures Trading Commission, FCA Chief Executive Officer Martin Wheatley said at yesterday’s hearing in London. The CFTC is going over 1 million e-mails as well as taped phone calls as it examines whether ISDAfix, which helps determine everything from interest on annuities to borrowing costs on bonds linked to skyscrapers, was manipulated, a person familiar with the situation said earlier this year.

“We have asked for records, the CFTC has asked for records” as part of the probe into ISDAfix, Wheatley told lawmakers yesterday.

The British regulator’s review comes after the CFTC issued subpoenas to current and former brokers at ICAP (IAP) Plc, the International Swaps & Derivatives Association and 15 Wall Street dealers as part of its probe, Bloomberg News first reported April 8. Two people familiar with the matter told Bloomberg News in April that the FCA and CFTC were looking into whether ISDAfix had been manipulated.

Steve Adamske, a CFTC spokesman, declined to comment on Wheatley’s statements.

‘Treasure Island’

Brokers on ICAP’s U.S. interest-rate swap desk in Jersey City, New Jersey -- who are the focus of the investigation -- were paid as much as $7 million a year at the market’s peak, earning the group the nickname “Treasure Island,” two people familiar with the matter said in April.

The team of about 20 brokers made $100 million to $120 million annually for ICAP around 2008 and 2009, said the people, who asked not to be named because the details are private. The group benefits from a move more than a decade ago that put the firm in control of the computer screen used by the industry to price swaps in much of the $379 trillion market, one of the people said.

“ICAP is cooperating with the CFTC’s wider inquiry into this area, and due to its pending nature, we will not be commenting further,” Guy Taylor, a spokesman for London-based ICAP, said in an e-mailed statement yesterday.

ICAP collects the ISDAfix submissions from dealer banks for the rate that’s denominated in U.S. dollars, while Thomson Reuters Corp. calculates the figure, according to ISDA’s website. In all other ISDAfix currencies, Thomson Reuters collects and calculates the rate, according to the site.

Recorded Calls

Bloomberg LP, the parent of Bloomberg News, competes with ICAP in some businesses, including foreign-exchange and swaps trading, and with Thomson Reuters in providing financial data.

Recorded telephone calls and e-mails reviewed by the CFTC show that traders at Wall Street banks instructed ICAP brokers to buy or sell as many interest-rate swaps as necessary to move the ISDAfix rate to a predetermined level, a person with knowledge of the matter said in August.

By rigging the measure, the banks stood to profit on separate derivatives trades they had with clients who were seeking to hedge against moves in interest rates. Banks sought to change the value of the swaps because the ISDAfix rate sets prices for the other derivatives, which are used by firms such as Pacific Investment Management Co., said the person, who asked not to be identified because the details aren’t public.

Banks set ISDAfix for 10-year rate swaps at 3.107 percent today, up from 1.785 percent at the end of 2012, according to ICAP data.

To contact the reporters on this story: Matthew Leising in New York at mleising@bloomberg.net; Ben Moshinsky in London at bmoshinsky@bloomberg.net

To contact the editors responsible for this story: Nick Baker at nbaker7@bloomberg.net; Anthony Aarons at aaarons@bloomberg.net

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