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UBS Traders Convinced Brokers To Give Other Banks Fake Estimates Of Those Other Banks’ Fake Estimates Of LiborBy Matt Levine
The UBS Libor settlements are really a garden of infinite delights; there are many semi-literate, fully criminal emails and IMs and you can read them here or here or here or here or in the FSA Final Notice. It is hard to pick a favorite thing but here’s a quirky one from the FSA:
58. Certain [interdealer] Brokers also routinely disseminated their views about where LIBOR would set based on their market knowledge, including information about transactions in the relevant cash markets. These market views, commonly referred to as “run throughs”, were of assistance to market participants, including Panel Banks when determining their JPY LIBOR submissions. A number of Panel Banks relied on run throughs and on occasions some of them simply adopted them when making their submissions.
59. In addition to asking Brokers to make specific requests of Panel Banks for specific submissions, Trader A also asked Brokers to tailor their run throughs to benefit UBS’s JPY positions.
So: Trader A, the yen swaps trader who seems to have been the worst1 Libor manipulator at UBS, sometimes asked his brokers to lie when they wrote down their guesses of the rate that other people would guess those other people could borrow at. UBS in general, and Trader A in particular, seem to have been all-around horrible, granted, but it’s worth taking a step back to notice the oddity of the system they lived in:
Trader A manipulated a second derivative of borrowing rates: not a rate, not a guess of a rate, but a guess of a guess of a rate. David Enrich finds this troubling:
It means that even if there were only a handful of banks trying to coordinate their Libor or Euribor submissions in an attempt at manipulation, other banks could have been unwitting participants in the attempted manipulation by relying on the brokers’ “run throughs.” In other words, a few banks’ attempted rigging could have been broadly amplified.
But that – picayune stupid trader jostling getting absurdly amplified – is pretty much Libor manipulation in a nutshell. Here’s the start of another exchange:
On 11 December 2007 Manager E emailed Senior Manager D asking “How much pressure can we exert on MMC to raise up our 3m yen fixing over the next week? We have 2mio/bp of fixing risk expiring on Dec imm.”
$2mm per basis point. UBS raised its submission by 2bps for the December 17 IMM fixing; UBS’s rate was included in the calculation and pushed the rate higher, by no more than 1/3 basis point.2 UBS made under a million dollars on this manipulation. Meanwhile in December 2007 there was $55 trillion (USD) of Japanese yen interest rate derivative notional outstanding.3 Assume that 10% of that was linked to JPY 3m Libor4, that 50% of it fixed on the IMM date, that it had a one-year average duration5 and you get $275 million per basis point. (Ignoring loans! What are loans?) If this little bit of manipulation made Manager E ~$4mm, it made and lost someone else – dispersed someones elses – a hundred million dollars.6
The evidence is conflicting – there’s a fair number of instances of UBS traders telling each other over IM “dude don’t IM about all the Libor manipulating you’re doing”7 – but one way to read a lot of these exchanges is that many UBS Libor manipulators genuinely didn’t know that it wasn’t okay to lie about Libor, and ask other banks to lie about Libor, and offer bribes to interdealer brokers to get them to get other banks to lie about Libor.8 Libor was a number, and someone made it up, and so why wouldn’t you make it up to suit you as opposed to otherwise? Manager E, on December 11, 2007, goes on about his 3m yen trade:
“We have been riding a wave on this trade, but everyone will be trying to influence the fixing next Monday [17 December 2007] reflecting their positions. If we don’t do the same we risk an adverse PL [i.e. an adverse impact on UBS’s profits]. Currently we are in the bottom quartile. A move to the middle [of the pack] is worth 500k. There is some reluctance on their part to move it higher as they are concerned about the reputational risks of putting in a high fix. I’d agree with this if we were to set in the top quartile that may be the case, but I don’t think anyone’s really got their eye on UBS’s 3m yen fix. If our position is bigger then [sic] MMC, we should be doing what’s best for the bank. What are your thoughts please?”
MMC = “Money Market and Commodities,” the desk that (1) made Libor submissions for UBS and (2) apparently had positions affected by Libor fixings. You tot up MMC’s book, you weigh it against the derivatives book, you throw in a fudge factor for reputational risks, and that determines your Libor. Makes sense, too, when you think, as UBS did, that “everyone [else] will be trying to influence the fixing.” And it’s hard to argue they were wrong.
You’re never lying, either – the fact that Libor was a made-up number gave a lot of cover for euphemisms like:
“It is highly advisable to err on the low side with fixings for the time being to protect our franchise in these sensitive markets. Fixing risk and PNL thereof is secondary priority for now”.9 The directive to “err on the low side” was intended to result in lower submissions that would send a positive message to the market about UBS’s creditworthiness.
Or, from the Swiss FINMA:
During the entire period under inquiry up until September 2009, submitters responsible for UBS’s CHF LIBOR constantly rounded their submissions up or down by a quarter to a half bp in favour of UBS’s proprietary trading positions.
You’re not lying, you’re “erring on the side of” something. You’re “rounding.” Who doesn’t like round numbers? Then there’s my favorite euphemism, gorgeous in its cynicism, from the FSA again:
Even when the trading and submitting roles were split in September 2009 (in relation to LIBOR) and October 2009 (in relation to EURIBOR), UBS’s systems and controls did not prevent Traders from persisting with their Internal Requests and attempting to influence submissions by camouflaging them as “market colour”.
I love those traders for their “market color,” which is not quoted but presumably took the form of “I’m hearing in the market that 3m USD Libor seems too low and colorful language will be used if it doesn’t get higher.” Of course the Libor submitter would be interested in the swaps trader’s market color. After all, the swaps trader is plugged in to the street and the Libor community. He talks to interdealer brokers! Surely he’s well placed to know what Libor should be? I mean, he has no idea what rates UBS can borrow at, but what does that have to do with anything?
FSA Final Notice: UBS AG [FSA]
FINMA Summary Report UBS Libor [FINMA]
UBS Is Fined $1.5 Billion for Manipulating Libor Rates [Bloomberg]
UBS to Pay $1.5 Billion to Settle Libor Charges [WSJ]
The three ‘muscateers’, captain ‘caos’ and SUPERMAN Assemble (at UBS) [FTAV]
UBS’s lies [Felix Salmon]
1. Viz. best!
2. [Updated a bit.] The panel is 13 banks; top and bottom quartile are kicked out and rest are averaged. Don’t have full panel data but the FSA says UBS was included, after previously being kicked out as bottom quartile. The fixing that day was 1.025%, lower than the previous Friday’s 1.03375% but higher than the following day’s 1.00125%.
4. The Wheatley Review stats note that 27% of all Libor swaps are in JPY, making it the second-most-popular Libor currency behind USD, but only 3.6% (13.3% of JPY trades) are fixed on the 3m – most are 6m. If you assume that (1) the bulk of JPY interest rate swaps are based on JPY Libor and (2) ~13% of those are based on 3m JPY Libor, then 10% of JPY swaps being 3m JPY Libor swaps seems plausible.
6. Ooh one thing you could debate is: what is the value of a basis point on a quarterly fixing? On a cash flow basis it’s 1/4 of the value of a basis point for a year: if you manipulate Libor up by 1bp this quarter, next quarter it should be back to “normal” so you only got the extra bp for a quarter of a year. On the other hand, on a fair value basis a 1bp higher Libor this quarter sort of implies a 1bp higher Libor next quarter – sort of – so your mark to market looks more like a full year of the extra bp. Anyway, you could read that sentence to say “if this trade made Manager E $250k, it made & lost someone[s] else $25mm.” Point is: lotta money.
During a discussion in a public chat group with 58 participants on 25 June 2009, Trader-Submitter C openly solicited several colleagues for Internal Requests in respect of EURIBOR submissions. Later on the same day, in a private chat Manager D said to Trader-Submitter C: “JUST BE CAREFUL DUDE”. Trader-Submitter C replied: “i agree we shouldnt ve been talking about putting fixings for our positions on public chat”.
All of you: morons.
8. This is less of an excuse for them and more of a criticism of UBS, which was pretty much the Wild West of Libor manipulation. The Swiss FINMA report notes that UBS developed revised Libor submitting policies to improve its processes. FINMA has some objections to the details but also notes, beautifully, that “In addition, the August 2008 procedures were never circulated among submitters and no formal training was conducted with respect to the procedures.” They had a Libor submitting policy, but they didn’t tell any of the Libor submitters about it!
9. Note that there is no third priority, and “accurately reflecting our borrowing costs” isn’t even on the list. This is an August ’07 email to three “Senior Managers.”