Bafin Issues Rate-Submission Standards in Wake of Libor Probes

Germany’s financial watchdog told banks to bolster internal oversight of benchmark-setting processes to guard against manipulation in the wake of the Libor-rigging scandal.

Bafin last month wrote to German lenders on benchmark panels, including Libor and Euribor submissions, Bafin spokesman Ben Fischer said in an interview today. The document specifies minimum risk-control standards banks must adhere to and includes regular reviews from bank units not involved in rate setting, he said.

The rules “are the result of our reviews and probes of about a dozen banks and their rate submitting processes,” Fischer said. “While we have already asked banks individually what to change, we wanted to formulate a general standard applicable uniformly to all.”

Regulators around the world are investigating whether more than a dozen firms, including Deutsche Bank AG, colluded to rig benchmark interest rates. Barclays Plc, UBS AG and Royal Bank of Scotland Group Plc are among companies that have been fined about $3.7 billion for rigging the London interbank offered rate, or Libor, the benchmark for more than $300 trillion of securities worldwide.

The Bafin requirements stipulate transparent documentation and the clear allocation of responsibilities within banks. Senior management must get involved as soon as implausible findings are flagged that can’t be sorted by the units handling the rates, according to the rules.

Independent Units

At least once a month an independent unit not handling rate submitting must review the process. It must also be possible to examine submissions at a later stage to allow sample tests in hindsight, according to the rules.

Bafin found that lenders had classified rate submission processes as “low risk,” prompting banks to either have no controls at all or to weak ones, the regulator said on its website.

The new standards were posted on the regulator’s website to make sure all banks are aware of the requirements, Fischer said. Those banks who have participated in a benchmark were also informed by the letter, he said.

Starting in 2012, Bafin has reviewed processes at about a dozen banks, according to Fischer. The regulator ordered special probes at some where it deemed such a step necessary, he said. He didn’t identify any of the banks.

A Frankfurt labor court in September said Deutsche Bank’s internal rate submitting processes caused a “permanent conflict of interest.”

The lender “is complaining about a behavior the bank itself only made possible,” according to the court that ruled four Libor traders were wrongfully fired by the bank. Deutsche Bank filed an appeal against the ruling last week.

Bafin in August finalized its first report as part of its special probe into Deutsche Bank, a person familiar with the issue said at the time. That probe is continuing.

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