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ICAP CEO Says No Inappopriate Conduct Found in ISDAFix

ICAP’s Annual Profit Tumbles Amid ‘Extraordinarily Tough’ Year
The ICAP Plc logo is seen on the company headquarters at 2 Broadgate in London. Photographer: Chris Ratcliffe/Bloomberg

ICAP Plc Chief Executive Officer Michael Spencer said an internal probe into allegations brokers manipulated ISDAFix, the benchmark for the $379 trillion swaps market, found no evidence of wrongdoing.

The Commodity Futures Trading Commission is investigating employees at ICAP’s U.S. interest-rate swap desk as well as at least 15 banks over allegations they colluded to create inaccurate quotes to a computer screen used by the industry to price swaps to inflate bank profits, Bloomberg reported April 8.

“So far, nothing that we have discovered in our internal investigations gives me sleepless nights, and nothing that I’ve heard externally suggests ISDAFix has been tampered with,” Spencer told reporters on a conference call as the London-based inter-dealer broker reported full-year earnings today. “We have adhered to our procedures, so I would refute, at this moment, that there has been any misconduct by ICAP brokers.”

ISDAFix is based on submissions made to ICAP’s New Jersey office each day and displayed on an electronic screen known as 19901, which is used by corporate treasurers, asset managers and other market participants as a measure of wholesale funding costs. Regulators are investigating potential abuse of financial benchmarks after Barclays Plc, UBS AG and Royal Bank of Scotland Group Plc were fined a combined $2.5 billion for rigging the London and euro interbank offered rates.

“We think it is not analogous at all to the situation as regards Libor,” said Spencer, 57. “We have very strict rules for our staff” involved in the “monitoring and management of our screen. From all our investigations so far we don’t believe there’s been any failure with regards to those procedures.”

6,000 Companies

One potential source of price manipulation being probed is tied to ICAP brokers not updating the rate-swap price on the 19901 screen after they facilitate a trade between two banks, a a person with knowledge of the probe and a former ICAP broker in the Jersey City rate-swaps group who asked not to be identified for fear of retribution said on April 8.

ICAP enters those prices manually onto the screen, and dealers tell the brokers not to put trades into the system until all their business in a transaction is done, which skews market prices, according to the former broker, who said he witnessed such activity first-hand.

About 6,000 companies and financial firms subscribe to the pricing service, according to ICAP. Values published by it are accepted as a legal price by which swaps traders can terminate contracts or to mark the value of positions, according to the International Swaps & Derivatives Association.

‘Proper Process’

“I sincerely think there’s every chance we’ll find out that the process was properly handled and there has been no inappropriate conduct,” he said. “We have a very thorough, proper process of how we handle our screen.”

Spencer spoke after ICAP posted a bigger full-year profit than it indicated two months ago as it stepped up its cost-cutting program. Pretax profit before exceptional items in the year through March fell 20 percent to 284 million pounds ($435 million) from 354 million pounds in the year-earlier period. ICAP cut its profit forecast on March 27 to 280 million pounds. Sales fell 12 percent to 1.47 billion pounds, less than the 13 percent drop ICAP indicated.

The stock advanced 14 percent in London trading to 339.70 pence, its steepest advance since March 2009.

Spencer is seeking to cut expenses by reducing the number of brokers as well as their pay to mitigate the decline in revenue he attributes to the slowing economy and interest rates at record lows.

The company said it has reduced costs by 80 million pounds a year, 20 million pounds more than previously announced. The number of brokers the firm employs fell by 152 to 2,195, and their pay has been restructured, ICAP said, without giving more details.

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