ISDA Taps Oliver Wyman to Review Swap Pricing Probed by CFTC

The International Swaps & Derivatives Association hired consulting firm Oliver Wyman to make recommendations on how to modify an interest-rate swap pricing process that is under investigation by a U.S. regulator.

The hiring comes as Bloomberg News reported April 8 that the U.S. Commodity Futures Trading Commission subpoenaed ICAP Plc and as many as 15 dealers related to potential manipulation of benchmark rate-swap measures, including the so-called ISDAfix rates. The rates were created in 1998 by ISDA with the predecessors of Thomson Reuters Corp. and ICAP.

Oliver Wyman, which is a unit of New York-based insurance broker Marsh & McLennan Cos., advised the British Bankers’ Association in its review of how the London interbank offered rate was being set amid a probe into allegations that the benchmark was being manipulated. UBS AG, Royal Bank of Scotland Group Plc and Barclays Plc have paid $2.6 billion in fines for rigging Libor rates.

“As part of that process some best practices were articulated,” Steve Kennedy, a spokesman for ISDA, which is the main industry and lobbying group for the privately negotiated swaps market and participated in the Libor study, said in a telephone interview. “We anticipated during that review that we’d want to do the same thing for ISDAfix.”

Funding Benchmark

The ISDAfix prices and intraday trading levels that ICAP displays on an electronic screen known as 19901 are used by everyone from corporate treasurers to money managers to gauge wholesale funding costs. The Federal Reserve includes the rates in a daily report on money markets, and they’re used to set daily values for much of the global rate-swaps market.

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 ISDA.

A representative for Oliver Wyman didn’t return telephone calls seeking comment. Marsh & McLennan is the largest insurance broker by market value.

The CFTC is probing swaps trading as it works with European counterparts in the rate-rigging scandal surrounding Libor. ICAP brokers in London have passed on requests from dealers asking rate-setters at rival banks to make favorable submissions, e-mails released as part of the European probe show.

Libor Manipulation

The BBA hired Oliver Wyman to provide technical assistance for part of its review of how Libor rates are set, the group said in a March 28, 2012, statement. The lobby group decided to cut the number of currencies and maturities included in the benchmark and is now handing over oversight of Libor to a new operator to be selected by the government.

“It’s obviously reminiscent of the Libor manipulation issue,” Darrell Duffie, a finance professor at Stanford University, said in a telephone interview. “People may have been naïve that simply reporting these rates was enough to avoid manipulation.”

Like Libor, which is the rate at which banks say they would lend to each other, ISDAfix is derived from a process where 15 banks submit bids and offers for swaps in various currencies and denominations, according to ISDA’s website. The rates are distributed by Thomson Reuters, Telekurs and Bloomberg LP, the parent company of Bloomberg News, according to the ISDA website.

“What the regulators are realizing is to maintain credibility in the financial markets you are going to have to almost run a continuous audit of these things,” Brad Hintz, a brokerage-firm analyst with Sanford C. Bernstein & Co. in New York and a former chief financial officer of Lehman Brothers Holdings Inc., said in a telephone interview.

‘Treasure Island’

The CFTC is investigating whether ICAP brokers colluded with dealers who stand to profit from inaccurate quotes, including failing to update published prices after trades occur, one of the people familiar with the probe said. ICAP said in a statement yesterday it maintains policies prohibiting the alleged behavior and is cooperating with the CFTC’s wider inquiry.

The CFTC has issued subpoenas to about a dozen current and former employees at ICAP’s Jersey City, New Jersey, swaps-brokering group, nicknamed “Treasure Island” because of the size of the commissions it earns, said three people familiar with the investigation. Dealers including Goldman Sachs Group Inc. and Deutsche Bank AG that contribute prices used to set the daily swap rates also have been subpoenaed, two people familiar with the matter said.

‘Good Regulation’

Along with Goldman Sachs and Deutsche Bank, the ISDAfix contributors are: Bank of America Corp., Barclays, BNP Paribas SA, Citigroup Inc., Credit Suisse AG, HSBC Holdings Plc, JPMorgan Chase & Co., Mizuho Financial Group Inc., Morgan Stanley, Nomura Holdings Inc., Royal Bank of Scotland, UBS and Wells Fargo & Co., according to ISDA.

Hintz said the CFTC investigation was an example of “good regulation” because it’s coming ahead of any crisis or scandal in the rate-swaps market. It may be relatively easy for investigators to determine if prices were manipulated, similar to how they conducted the Libor case, he said.

“The Libor analysis was a relatively straightforward analysis,” he said. “All you had to do was look at the trading. All the trading floors these days are being taped,” which will allow investigators to uncover any manipulation, he said.