Meet ISDAfix, the Libor Scandal's Sequel

A probe into rate rigging in an obscure benchmark for swaps
Illustration by 731

After fining banks billions of dollars over the last year for distorting a key interest rate known as Libor, regulators in the U.S. are now investigating whether a more obscure rate in another huge market is also rigged.

The rate, known as ISDAfix, is a benchmark in the $379 trillion market for interest rate swaps, which corporations and governments use to fine-tune their borrowing costs. U.S. regulators have subpoenaed as many as 15 banks and about a dozen current and former brokers at ICAP, the company that collects the data submitted by banks to set ISDAfix prices, to determine if they’re colluding to manipulate quotes. ICAP said in a statement on April 9 that it had no knowledge of price manipulations by its brokers, and that it is conducting its own inquiry.

The probe, by the U.S. Commodity Futures Trading Commission, echoes last year’s Libor scandal because both involve benchmarks that are handmade. In other words, they’re determined by humans, not by data automatically entered from actual trades, making them susceptible to falsifying for profit. The agency is also investigating possible manipulation in gold and silver indexes, according to the Wall Street Journal. “Given what we have seen in Libor, we’d be foolish to assume that other benchmarks aren’t venues that deserve review,” commission member Bart Chilton said in March. (Bloomberg LP, the parent of Bloomberg Businessweek, has sued the CFTC, seeking to bar the implementation of a regulation related to the clearing of swaps.)

A panel led by CFTC Chairman Gary Gensler and U.K. Financial Conduct Authority Chief Executive Officer Martin Wheatley is pushing for an overhaul of how rates like ISDAfix and Libor are computed. “To promote market integrity, it is critical that benchmark interest rates be anchored in observable transactions,” Gensler said in a statement. An April 16 report by the International Organization of Securities Commissions found that benchmark setting is a process with “opportunities for abusive conduct,” through submission of “false and misleading data” or attempts to buy off the people who physically enter submissions.

That is what the CFTC is investigating at London-based ICAP, the biggest broker of interest rate swaps between banks. In their simplest form, swaps are used by investors to exchange a fixed interest rate for a floating one, or vice versa. They also come in profoundly more complicated flavors, and altogether they constitute more than half of the $639 trillion global derivatives market. ISDAfix, used by traders to settle contracts and value positions, is commonly found in hybrid securities known as structured notes that are popular with wealthy investors.

While they affect everything from pension annuities to commercial real estate investments, ISDAfix rates are esoteric even by the standards of structured finance. The head of trading at a structured products desk at a Wall Street dealer, a derivatives lawyer at a major U.S. firm, academics at universities, and a brokerage analyst, all interviewed by Bloomberg, had never heard of the benchmark. There isn’t even an ISDAfix definition at

ICAP publishes ISDAfix prices each morning at 11 a.m., after 13 banks, including Goldman Sachs and JPMorgan Chase, submit bids and offers for interest rate swaps in various currencies. ICAP brokers update the numbers throughout the day based on reported transactions. The data, displayed on an electronic screen known as 19901, are followed by about 6,000 corporate treasurers, money managers, and other clients, who use swaps to protect against changes in interest rates. Banks could earn millions by persuading ICAP brokers to delay their manual entry of data. Publishing stale prices can boost profits for banks dramatically. On a $500 million swap that matures in 20 years, for example, a delay that prevents the instrument from moving one basis point (0.01 percent) equals $1 million in profit for the dealer. “That screen makes or breaks a lot of profit and loss, so clearly there’s a lot of opportunity for influence,” says David Kelly, the director of financial engineering at Calypso Technology.

ICAP does more than track the data: Its brokers match dealers by phone, then enter transactions into the 19901 screen by hand. The firm is paid commissions based on the size of the trades it matches. It’s lucrative work. Brokers in ICAP’s Jersey City office were paid as much as $7 million a year, earning the outpost the nickname Treasure Island, according to a person familiar with the matter.


    The bottom line: Regulators are investigating possible manipulation of a rate that influences prices in the $379 trillion interest rate swaps market.

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