Regulators from Stockholm to Seoul are re-examining how benchmark borrowing costs are set amid concern they are just as vulnerable to manipulation as the London interbank offered rate.
Stibor, Sweden’s main interbank rate, Sibor, the leading rate in Singapore, and Tibor in Japan are among rates facing fresh scrutiny because, like Libor, they are based on banks’ estimated borrowing costs rather than real trades. In some cases they may be easier to rig than Libor as fewer banks contribute to their calculation, according to academics and analysts.
“Many of the ingredients which would make it easy to manipulate Libor and collude are common in other benchmarks,” said Rosa Abrantes-Metz, an economist with consulting firm Global Economics Group and an associate professor at New York University’s Stern School of Business. “Regulatory agencies are starting to take a look at those and there is a growing sense they need to change.”
Barclays Plc, the U.K.’s second-largest bank, was fined a record 290 million pounds ($450 million) last month for attempting to rig Libor and Euribor, its equivalent in euros, to appear more healthy during the financial crisis and boost earnings before it. At least 12 banks including Royal Bank of Scotland Group Plc and Deutsche Bank AG are being investigated for manipulating Libor.
Regulators and industry groups are now turning their attention to whether other benchmark rates were manipulated in the same way. Sweden’s central bank, the Japanese Bankers Association, the Monetary Authority of Singapore and South Korea’s Fair Trade Commission have all announced probes into how their domestic rates are set.
Libor is determined by a daily poll carried out on behalf of the British Bankers’ Association that asks banks to estimate how much it would cost to borrow from each other for different periods and in different currencies. Three-month dollar Libor was 0.453 percent on July 19.
Derivatives traders at Barclays asked colleagues who inputted the rate each day to amend their submissions to benefit their trading positions. They also contacted traders at other banks to ask them to do the same. Traders at Deutsche Bank, HSBC Holdings Plc, Societe Generale SA and Credit Agricole SA are under investigation for interest-rate manipulation, a person with knowledge of the matter said.
With 18 banks on the panel for U.S. dollar Libor and 43 banks for Euribor, only small moves can be achieved by making deliberately high or low submissions. Manipulation becomes easier when fewer banks are contributing, according to Abrantes-Metz at Global Economics.
“Collusion typically occurs in markets with just a few players,” Abrantes-Metz said. “All else being equal, the smaller the group, the easier it is to collude.”
Stibor, the Stockholm interbank offered rate, is set by five banks after RBS pulled itself off the panel on April 30. It is calculated by Nasdaq OMX Stockholm every day for eight maturities.
Riksbank, the Swedish central bank, said in its biannual Financial Stability Report published June 1 that market participants were concerned about Stibor, the basis for 40 billion Swedish krona ($5.8 billion) of loans and financial contracts.
“Many market participants state in the Riksbank’s latest risk survey that there are problems with the Stibor,” the report stated. ”This refers to incentives for the banks to set the Stibor at fair levels, the opinion that too few banks determine the Stibor and the insufficient transparency of the Stibor and its framework.”
The central bank was unavailable for comment because they are on vacation, said spokeswoman Cecilia Roos Isksson.
Nibor, the Norwegian rate, is set by a panel of six banks. Cibor, the Copenhagen rate, is based on a group of eight lenders.
Tibor, the Tokyo interbank offered rate, is set by the Japanese Bankers Association based on submissions from 16 banks for yen and 15 lenders for euroyen, according to the industry group’s website.
The association yesterday asked the banks to answer questions on how they make their submissions, said spokesman Hisanao Aoki. The reference banks, including lending units of Mitsubishi UFJ Financial Group Inc., JPMorgan Chase & Co., Deutsche Bank and BNP Paribas SA, must reply by Aug. 10.
Citigroup Inc. and UBS AG were ordered to suspend some operations in Japan last December after the Financial Services Agency found their employees attempted to influence Tibor to a “favorable level” for derivatives trading. Citigroup was banned from trading tied to Libor and Tibor for two weeks, and UBS received a one-week suspension.
Association officials today met with the ruling Democratic Party of Japan’s finance committee, headed by former Morgan Stanley banker Tsutomu Okubo, to explain how Tibor is set.
“Barclays’s fine is enormous and far above the rate of such penalties typically imposed on Japanese financial institutions for wrongdoing,” Okubo said at the meeting. “We must strengthen investors’ trust in Tokyo’s financial market.”
Association Chairman Yasuhiro Sato, who is also chief executive officer of Mizuho Financial Group Inc., said today that while the process for setting Tibor is sound, he is open to making changes based on the review.
South Korea’s antitrust agency this week expanded a probe to see whether a key money-market rate was kept artificially high. The Fair Trade Commission inspected 10 brokerages and nine banks to determine if there was collusion on certificate of deposit rates, the agency said in an e-mailed statement.
The country’s 91-day certificate of deposit rate is a benchmark for bank lending and borrowing as well as for interest-rate swaps. Quotes are collected twice a day by the Korea Financial Investment Association from 10 brokerages.
“Korea is a relatively insulated system where the leading banks are influential in the local market and were under pressure to maintain their soundness and their profit margins during the crisis,” said David Marshall, an analyst at research firm CreditSights Inc. in Singapore. Manipulation in Japan, Singapore and Hong Kong is less likely, he said.
The Monetary Authority of Singapore said yesterday it will look into how banks are setting “key market interest rate benchmarks” amid similar reviews by regulators in several markets. The Association of Banks in Singapore sets Sibor based on submissions by 12 lenders. RBS said this week it decided to withdraw from the panel following the January announcement of changes to the Edinburgh-based lender’s strategic priorities. It has also withdrawn from the Tokyo and Hong Kong interbank offered rate-setting panels this year.
In Hong Kong, the performance of banks in contributing to set the benchmark Hibor rate is “reviewed regularly,” the Hong Kong Association of Banks said in an e-mailed statement today. The Hong Kong Monetary Authority said it hasn’t observed “any anomaly” over the past 20 years and will monitor the industry group’s review, according to an e-mailed statement. Hibor is set daily based on quotations provided by 20 lenders, according to the association’s website.
Barclays Plc, Britain’s second-biggest lender by assets, said this month it would pull out of the group of 12 banks in the United Arab Emirates whose quotes determine the interbank lending rate in the second biggest Arab economy. Dutch lender Rabobank last month withdrew from the panels that set Libor in Japanese yen, the Canadian dollar, the Swiss franc, the Danish krone and the Swedish krona. It continues to contribute toward Libor in U.S. dollars, euros and pounds.