UBS Trader Hayes Exposed at Core of Libor Investigation

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UBS Trader Hayes Exposed at Libor-Probe Core as E-Mails Released
Banks’ manipulation of interest rates has spawned probes by half a dozen agencies on three continents in what has become the industry’s biggest and longest-running scandal. Photographer: Gianluca Colla/Bloomberg

Tom Hayes, one of two former UBS AG traders charged by U.S. prosecutors, is portrayed by American regulators as the kingpin of a three-year campaign that succeeded in manipulating global interest rates.

Hayes, 33, was charged with wire fraud and price-fixing, the Department of Justice said in a criminal complaint unsealed yesterday. The trader and Roger Darin, a former short-term interest-rates trader at UBS whose responsibilities included the firm’s yen Libor quotes, were also charged with conspiracy. Yen Libor reflects how much banks charge each other for loans in the Japanese currency.

Hayes colluded with brokers, counterparts at other firms and his colleagues to manipulate the rate, the Justice Department said. Between 2006 and 2009, a UBS trader made at least 800 requests to the firm’s yen Libor rate-setters, about 100 to traders at other banks, and 1,200 to interdealer brokers, according to the Commodity Futures Trading Commission, which didn’t identify Hayes by name.

“Many UBS yen derivatives traders and managers were involved in the manipulative conduct and made requests to serve their own trading positions’ interests,” the CFTC said. “But the volume of unlawful requests submitted by one particular senior yen derivatives trader in Tokyo dwarfed them all.”

Shares Decline

UBS was fined 1.4 billion Swiss francs ($1.5 billion) by U.S., U.K. and Swiss regulators yesterday for trying to rig Libor, which is derived by asking banks how much it would cost to borrow from each other in different rates and currencies. The penalty amounted to about a third of the Zurich-based lender’s net income for 2011 and three times more than the 290 million pounds ($472 million) Barclays Plc agreed to pay in June.

UBS shares fell 1.3 percent to 15.01 francs at 9:40 a.m. in Zurich. They declined as much as 1.8 percent in earlier trading, paring annual gains to 34 percent.

Banks’ manipulation of interest rates has spawned probes by half a dozen agencies on three continents in what has become the industry’s biggest and longest-running scandal. More than $300 trillion of loans, mortgages, financial products and contracts are linked to Libor. U.S. mortgage financiers Fannie Mae and Freddie Mac, for instance, may have lost at least $3 billion from the rate’s rigging, according to a preliminary estimate by a federal auditor.

Criminal Probe

For traders, even minor Libor moves can fuel profits or losses. Moving the benchmark by just one-fifth of a basis point, or 0.002 percent, can produce a $250,000 gain on a $50 billion position.

Hayes joined UBS in 2006 and worked at the Swiss lender until 2009, when he joined Citigroup Inc. He was dismissed by Citigroup less than a year later for involvement in suspected rate-rigging, a person with knowledge of the matter said in October. He worked at Edinburgh-based Royal Bank of Scotland Group Plc from 2001 to 2003.

British fraud prosecutors opened a criminal probe this year and last week arrested Hayes, according to people familiar with the matter. Neither Hayes nor Darin have been accused by British regulators of wrongdoing. Hayes is separately being probed by Canada’s Competition Bureau for alleged rate manipulation along with counterparts at five banks including HSBC Holdings Plc, RBS and JPMorgan Chase & Co., a person briefed on the probe said in September.

‘Massive Effort’

Jina Roe, a spokeswoman for the Serious Fraud Office in London, declined to comment. Efforts to contact Hayes and his lawyer were unsuccessful. Darin, 41, didn’t respond to a voicemail message left on his mobile phone.

Hayes “globally impacted transactions and financial products tied to yen Libor,” defrauding counterparties including New York-based financial institutions, the Justice Department said. The trader led a “massive effort” to manipulate yen Libor, at times daily to profit from his bets on derivatives, the CFTC said yesterday.

The Justice Department said it has at least two cooperating witnesses giving evidence about Hayes, including a junior UBS trader and a junior submitter -- a bank employee who provides estimates used to calculate Libor. On more than 335 of the 738 trading days from Nov. 2006 until Aug. 2009, sometimes on continuous days, Hayes or the cooperating junior trader asked Darin or two other submitters to accommodate his requests.

‘Dominant Trader’

In an electronic message in March, 2008, Hayes asked a UBS rate-setter for a high three-month yen fixing. The lender’s trading records show that Hayes had a trading position on March 17 that would profit by $2.1 million if the rate increased by a single basis point, the Justice Department said.

Hayes was “widely considered the dominant trader in the Tokyo yen swaps market because he traded in enormous volumes and accepted large trading risks,” the CFTC said. “Brokers were eager to develop relationships with the Senior Yen Trader in an effort to obtain a piece of his business.”

Each day, the British Bankers’ Association asks banks to estimate how much it would cost them to borrow in 10 currencies for periods ranging from overnight to one year. The top and bottom quartiles of quotes are excluded, and those left are averaged and made public before noon in London.

On March 27, a UBS employee identified by British regulators as “Trader A” e-mailed a colleague identified as “Manager A” to ask where yen Libor would be set and requested a lower fixing. In a transcript of the same conversation published by the Justice Department, Hayes is identified as the author and Darin as the recipient.

‘Low Side Pls’

“I dun mind helping you on your fixings, but I’m not setting libor 7bp away from the truth,” Darin replied to Hayes. “I’ll get UBS banned if I do that,” he said, according to the Justice Department’s transcript.

In an electronic chat on or about April 28, 2008, Hayes requested a low six-month Libor submission from Darin.

“Hi roger i have a 5OOk usd fix in 6m today, can we try to keep it on the low side pls?” Hayes asked.

“I’ll submit something low ... but if u can u should square it up,” Darin responded, before adding: “The correct 6m is 1.O899.”

“Appreciate the help,” Hayes wrote.

That day, UBS’s 6-month yen Libor submission was 0.98 percent, compared to Darin’s “correct” rate of 1.O8 percent, according to the Justice Department. The resulting 6-month yen Libor was a quarter of a basis point lower than it would have been had UBS inputted the correct rate, the Justice Department said.

‘Any Favors’

He also allegedly worked with interdealer brokers to help persuade other rate-setting banks to make favorable submissions. Interdealer brokers line up buyers and sellers of securities and take a percentage from every trade. As interbank lending declined with the start of the financial crisis in late 2007, submitters increasingly relied on information from the brokers in determining what rates to submit, the Justice Department said.

On March 3, 2010, Hayes asked a broker identified as A3 if he could ask the rate-setter at an unidentified Edinburgh-based bank to lower his three-month yen libor submission, the Justice Department said.

“I really need a low 3m jpy libor into the imm,” Hayes wrote, referring to the International Money Market dates, when three-month Eurodollar futures settle. The value of traders’ positions, often billions of dollars, was affected by where the dollar Libor was set on those days. “Any favours you can get with [Bank C Submitter] would be much appreciated ... even if [the Bank C Submitter] only move 3m down 1bp,” Hayes said, according to the Justice Department’s transcript.

‘Libor Lower’

The following day the rate setter at the Scottish bank reduced his submission in line with Hayes’s request and sent Broker A3 a message saying: “Libor lower ;).”

British regulators allege Trader A paid brokers hidden fees through phoney trades and offered to compensate colleagues and competitors for acquiescing to his requests.

“If you keep 6s unchanged, I will f-----g do one humongous deal with you,” he told a broker on Sept. 18, 2008, referring to six-month yen Libor. “If you do that ... I’ll pay you, you know, $50,000, $100,000... whatever you want ... I’m a man of my word,” according to a transcript of a call released by Britain’s Financial Services Authority that didn’t identify Hayes.

1,000 Requests

About 40 individuals at the bank, including 11 managers, sought to manipulate the rates. At least two further managers and five senior managers were aware of the practice, the FSA said. Most of the internal requests, all of the requests to other banks and almost all the negotiations with brokers were made by Trader A, according to the Swiss Financial Market Supervisory Authority.

Trader A made more than 1,000 requests to 11 employees at six brokers for assistance in rigging the rate, the FSA said. He also asked the firms to help mislead other banks by altering the cash rates they displayed on clients’ electronic screens, the London-based watchdog said.

He compensated them through so-called wash-trades. In the period from Sept. 19, 2008 to Aug. 25, 2008, Trader A as well as a colleague entered into nine of the transactions to pay an unidentified broker more than 170,000 pounds for helping rig the rate, regulators said.

In a wash-trade, a trader submits two or more risk-free trades through a broker which cancel each other out while triggering a payment of fees to the broker arranging the trade.

UBS also paid 15,000 pounds a quarter to a second unidentified interdealer broker over an 18-month period for the provision of a “fixing service” for yen Libor, the U.K. regulator said. The firm, which provided Libor panel banks with a daily “run through” on where it estimated the rate would set, would tailor its commentary to suit Trader A’s requests, the British regulator said.

The case is U.S. v. Hayes, Darin, 12-mag-3229, U.S. District Court, Southern District of New York (Manhattan).

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