Interdealer Brokers Emerge as Key Enablers in Libor Scandal

Interdealer brokers, the middlemen who line up buyers and sellers of securities for banks, are emerging as key enablers in the Libor scandal after three firms paid a total of $2.6 billion for rigging global interest rates.

Employees at firms including ICAP Plc, the world’s biggest interdealer broker, and RP Martin Group Ltd., a smaller British competitor, passed on requests from derivatives traders asking rate-setters at others banks to make favorable submissions, e-mails released as part of the global probe of interest rate-rigging show. In some cases, the middlemen took bribes as payment for the services in the form of so-called wash trades, regulators said, without identifying the firms that did.

The brokers assumed greater influence as credit markets froze at the start of the financial crisis in 2007. Bankers charged with making submissions to the London interbank offered rate increasingly relied on information from the brokers to determine what figures to contribute. That left the benchmark vulnerable to manipulation by traders trying to profit from bets on derivatives. The outcome of those bets often depended on where the Libor rate fell on International Money Market dates, or IMMs, the quarterly dates when futures contracts settle.

“I really need a low 3m jpy libor into the imm...” one trader e-mailed a broker on March 3, 2010, according to a transcript of a conversation released by the U.S. Department of Justice when Royal Bank of Scotland Group Plc paid a $612 million fine for interest-rate rigging on Feb. 6. “Any favours you can get with [Submitter-1] would be much appreciated...”

‘Steak’ Offered

That discussion was between Tom Hayes, the former UBS AG and Citigroup Inc. trader arrested in December over his alleged role in the scandal, and Brent Davies, an employee at ICAP in London, according to three people with knowledge of the matter. The submitter was Paul White, an employee at Edinburgh-based RBS, said the people, who asked not to be identified because they weren’t authorized to speak publicly.

Later that day, Davies asked White if there was “any chance at all” he could lower his rate, adding “if u cud see ur way to a small drop there might be a steak in it for ya,” the transcript shows.

In the exchange, White said his rate should be unchanged. The next day he lowered his three-month yen Libor submission by 1 basis point, according to the regulator. A basis point is the equivalent of 0.01 percentage point.

Wash Trades

White declined to comment as did lawyers for Hayes and Davies. Davies, who isn’t under investigation by any regulator, joined ICAP in September 2009 and was suspended on full pay from January 2012, one of the people said. ICAP is being investigated by Britain’s Financial Services Authority as well as Canada’s Competition Bureau.

The firm has put three more employees on paid leave, Chief Executive Officer Michael Spencer told reporters on a conference call yesterday after the firm said trading volume increased in January. He said the London-based firm has led its own internal investigation and hasn’t found any wash trades it has been involved with.

“I’m pleased that the FSA and other regulators are investigating this thoroughly and rooting out any wrongdoing so that the industry can, in time, heal and move on and learn from it and be better for it,” Spencer said. ICAP hasn’t made any provisions for costs arising from the Libor scandal, he added.

Close-Knit World

Two RP Martin brokers were arrested in London on Dec. 11 as part of British prosecutors’ inquiry into Libor-rigging. Spokesmen for RBS, UBS, Citigroup, RP Martin and the FSA declined to comment.

Conversations such as Hayes’s took place on a daily basis in the close-knit world of rates trading, where most participants knew one another from social events organized by the brokers themselves, or from working together previously, according to former employees who declined to be identified because of the probes. Davies, Hayes and White had all worked together on RBS’s trading floor in London.

Interdealer brokers helped Hayes in his alleged three-year campaign to rig yen Libor. From 2006 to 2009, the trader made 1,200 requests to at least five brokers, the U.S. Commodity Futures Trading Commission said in its Dec. 19 settlement with UBS.

I need “to keep 6m up till tues then let it collapse,” Hayes wrote in one instant message chat with an unidentified broker on Aug. 17, 2007, according to a transcript released by the Justice Department on Dec. 19.

‘Good Job’

“Doing a good job so far ... as long as the liquidity remains poor we have a better chance of bullying the fix,” the unidentified broker responded. The following day, Hayes reiterated his need for a high fix, to which the broker replied “yep think I realise that” and “yes mate, will make myself useful.”

On occasion, UBS traders also asked brokers to help mislead traders at other banks by altering the cash rates they displayed on clients’ electronic screens, the CFTC said.

UBS paid 15,000 pounds ($24,000) a quarter to an unidentified broker over an 18-month period for the provision of a “fixing service” for yen Libor, the FSA said in its settlement with the bank. The broker, which provided Libor panel banks with a daily “run-through” on where it estimated benchmark rates would be set, would tailor its commentary to suit Hayes’s requests.

Wash Trades

Brokers were willing to help traders to win future work. Some were also rewarded with so-called wash trades, where counterparties place two or more matching trades through a broker that cancel one another out while triggering a payment of fees to the middle man, according to transcripts released by regulators on Feb. 6.

Hayes colluded with RBS derivatives trader Neil Danziger to make almost 211,000 pounds of illicit payments to two brokers, regulators said in filings that didn’t identify the individuals and firms. One of the brokers was RP Martin, people with knowledge of the matter said. Danziger didn’t return messages or a request for comment left with his lawyer.

“Can you do me a favor,” the broker asked Danziger on Sept. 19, 2008, according to a transcript released by the CFTC. “You’re not going to get paid any bro for this and we’ll send you lunch around for the whole desk.” As the broker outlined the trade, he said “Take it from UBS, give it back to UBS. He wants to pay some bro,” referring to fees.

“Yeah, yeah,” Danziger replied.

Later that day, the broker asked Danziger if he could “do another 100 yards” or 100 billion, increasing the size of the transaction. “Flat switch,” the broker said. “I know I’m pushing my luck.”

The broker netted about $31,000 in fees from the trades, according to the CFTC.

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