ICAP Losing Grip on Setting U.S. Swaps Rate Amid Inquiry

ICAP Plc (IAP) is about to be stripped of its function setting a U.S. benchmark for interest-rate swaps as regulators look into whether banks manipulated the measure.

The International Swaps & Derivatives Association Inc. picked Thomson Reuters Corp. (TRI) to handle collecting data from banks that are used to calculate the dollar-denominated version of ISDAfix, a measure used in the $426 trillion swaps market, according to ISDA spokesman Steven Kennedy. He said the shift away from ICAP, a London-based broker, will begin this week. Reuters already handles versions of the rate outside the U.S.

Choosing a single firm to calculate all ISDAfix rates “and other changes to be implemented this week strengthen the process, governance and controls for the existing ISDAfix framework,” Kennedy wrote in an e-mail yesterday.

U.S. regulators have found evidence that the rate, which is set daily based on data reported from banks, was rigged at the expense of pensions and other institutional investors, Bloomberg News reported last year. ICAP operates a desk in Jersey City, New Jersey, where traders collected the bank submissions, which were used to set the U.S. dollar ISDAfix.

Bloomberg News reported in September that ISDA, a trade group for the derivatives industry, planned to set all of the rates based on actual trades, instead of trusting the information banks submitted. Centralizing all ISDAfix calculations with Thomson Reuters is a first step, Kennedy said.

Photographer: Chris Ratcliffe/Bloomberg

The company logo is displayed outside the ICAP offices in London. Close

The company logo is displayed outside the ICAP offices in London.

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Photographer: Chris Ratcliffe/Bloomberg

The company logo is displayed outside the ICAP offices in London.

First Phase

ISDA’s changes “mark the first phase of our work to ensure alignment of ISDAfix practices with evolving best practices in the setting of benchmark rates,” Kennedy said. “The second stage will be the move to an automated, market-based ISDAfix rate setting process, which is expected to begin in the second quarter of 2014.”

David Girardin, a Thomson Reuters spokesman, declined to comment. The Wall Street Journal reported yesterday that the company would take over the U.S. ISDAfix collection.

“We appreciate ISDA’s interest in having a consistent polling process across each of the relevant currencies and fixings,” ICAP spokesman Guy Taylor said in an e-mailed statement, noting that the broker’s involvement with ISDAfix stretches back more than 15 years. “As swap market structures evolve, we remain committed to participating in the development and administration of benchmark processes where we can add value to market functioning and transparency.”

Benchmark Scandals

Scandals have undermined the reliability of financial benchmarks. Market authorities in the U.S. and U.K. collected billions of dollars in fines from dealers that rigged Libor rates. Separately, Bloomberg News reported last year that banks may have manipulated foreign-exchange rates.

The U.S. Commodity Futures Trading Commission and the U.K. Financial Conduct Authority are investigating alleged manipulation of ISDAfix, FCA Chief Executive Officer Martin Wheatley told lawmakers in London in September.

The CFTC issued subpoenas to current and former brokers at ICAP, ISDA and 15 Wall Street dealers as part of its probe, Bloomberg News reported last year.

Chris Hamilton, FCA spokesman, declined to comment on the matter.

By rigging ISDAfix, 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 other derivatives, which are used by firms such as Pacific Investment Management Co., a person familiar with the matter said last year.

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 news and data.

To contact the reporter on this story: Matthew Leising in New York at mleising@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net

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