Banks are leaving the panel that sets ISDAFix, the benchmark for the $379 trillion swaps market, as regulators probe suspected manipulation of the rate.
HSBC Holdings Plc, Europe’s largest bank by assets, and Japan’s Mizuho Financial Group stopped contributing to the ISDAFix dollar rate between November and January, and haven’t been replaced, documents on the International Swaps and Derivatives Association’s website show. The industry group didn’t give any reason for the lenders’ departure.
Firms are pulling out of rates such as the London interbank offered rate, Euribor and ISDAFix on growing concern that they may face lawsuits, fines and criminal penalties if found to have engaged in wrongdoing. Without data from a large number of firms, benchmarks risk becoming unrepresentative and losing the confidence of the market, said Owen Watkins, a former regulator at the U.K.’s Financial Services Authority.
Banks across the industry are “concerned about the regulatory scrutiny and they don’t see any upside,” said Watkins, who’s now a lawyer at Lewis Silkin LLP in London. “If it continues, the authorities would look to compel institutions to provide quotes, either through regulation or statute.”
Regulators including the U.S. Commodity Futures Trading Commission and the U.K.’s Financial Conduct Authority, one of the FSA’s successors, are working on a set of principles to govern all financial benchmarks after they fined Barclays Plc, UBS AG and Royal Bank of Scotland Group Plc more than $2.5 billion for rigging Libor. The CFTC has issued subpoenas to brokers at ICAP Plc and as many as 15 banks amid allegations ISDAFix was rigged, Bloomberg News reported on April 8.
ISDAFix is used as a reference for parties looking to settle interest-rate options and cancel swaps contracts. The rates were created in 1998 by ISDA with the predecessors of ICAP and Thomson Reuters Corp., which competes with Bloomberg LP, the parent company of Bloomberg News, in providing news, information, and trading systems to the financial community.
Rates are published in eight currencies and the U.S. Federal Reserve includes them in a daily report on money markets. Like Libor, it is based on an average of submissions from banks rather than actual trade data, leaving it vulnerable to manipulation, according to William Gilmore, a former futures broker and founder of Gilmore & Co., a risk analysis and derivative-valuation firm based in Bath, western England.
The CFTC is probing whether ICAP brokers delayed updating rate-swaps prices on the so-called 19901 screen, which displays swaps prices, after they facilitated a trade between banks, according to one person familiar with the matter and a former broker in ICAP’s Jersey City rate-swaps group who both asked not to be identified because of the investigation. Publishing stale prices can potentially boost profits for banks in a market where trades are tied to tens of millions of dollars at a time.
ICAP said in an April 9 statement it maintains policies prohibiting price manipulation and is cooperating with the CFTC’s wider inquiry. The shares were down almost 3 percent at 289.7 pence as of 9:26 a.m. in London trading today.
The decision by HSBC and Mizuho reduced the number of banks on the panel to 13. ISDA has since cut the minimum number of quotes required to generate the rate each day to eight from 10. Spokesmen for ICAP and ISDA declined to comment. Officials at Mizuho didn’t respond to requests for comment.
“HSBC reviews its participation in benchmark reference rates settings on an ongoing basis,” the London-based lender said in an e-mailed statement. Officials at the bank declined to comment on specific benchmarks.
Other firms have already reduced their contributions to benchmark rates. UBS, Citigroup Inc. and Rabobank Groep have all stopped contributing to Euribor, the interbank rate for euros. Rabobank withdrew in June from contributing to Libor in currencies including the Japanese yen and the Swiss franc. Barclays has left the panel that sets the United Arab Emirates’ interbank rate, while RBS no longer contributes to similar rates in Singapore, Tokyo and Hong Kong.
Martin Wheatley, the U.K. regulator charged with overhauling Libor, said in a September report it might be necessary to force firms to contribute to financial benchmarks “if submitting banks were to explore leaving.” Michel Barnier, the European Union’s internal market and services commissioner, said in February he was considering forcing lenders to participate in benchmarks including Euribor.
“The issue is one of continuity,” said Peter Hahn, a finance professor at London’s Cass Business School and a former managing director at Citigroup. “When you’ve got markets with so many contracts outstanding, there’s concern there could be disruption so there’s a huge effort to make sure the market continues to function. We need to balance the need to continue existing benchmarks with developing a set of truly independent benchmarks that are based on actual transactions.”