Time was, RBS had a lax policy on its employees manipulating the price of securities. It wasn’t something management had ever expressed a problem with and certainly no one was going to get fired for doing so, if it was even noticed, which typically it was not. Which is why trader Alex Mallinson felt comfortable engaging in a little market abuse, and why Alex Mallison would’ve continued engaging in a little market abuse, if one guy hadn’t come along and ruined things for the whole group. Read more »

If you’re ready to have LIBOR return to meaning simply “a very important interest rate” rather than “a scandal over a very important but easily-manipulated interest rate that for some reason NYSE Euronext wants responsibility for calculating,” you are out of luck. There are simply too many British regulators desperate to build/rebuild their credibility to allow those dregs to go undrunk. Read more »

  • 09 Jul 2013 at 10:47 AM

NYSE Wants To Be Responsible For Libor For Some Reason

The Hogg Tendering Advisory Committee announced today that it’s selling Libor to NYSE Euronext, which immediately raises questions like:

  • the “Hogg Tendering Advisory Committee”? Really? and
  • why would you want to own Libor?

So: one, yes, the Hogg Tendering Advisory Committee, my favorite name for a financial thing since the Tick Size Flexibility Act of 2013, was put in charge of picking someone to take over Libor. And, two, because it’s profitable I guess?1 It’s hard to tell; here’s how the Hogg Committee described Libor’s commercialization in its request for proposals: Read more »

The FX market’s entry into the Great Libor Scandal Lookalike Contest may have been a little underwhelming1 – Libor, a made-up number, was manipulated by making up a different number; the FX market’s WM/Reuters benchmark, which was derived from actual trades, was manipulated by actually trading – but the judges deemed it adequate:

“All benchmarks share similar vulnerabilities so there is a need for a framework that applies to all benchmarks to ensure their integrity and restore market confidence,” Chantal Hughes, a spokeswoman for European Union Financial Services Commissioner Michel Barnier, said in an e-mailed statement.

Trade-based and poll-based benchmarks would actually seem to share opposite, not similar, vulnerabilities, but whatever: uniform standard-setting is vaguely afoot, and “The International Organization of Securities Commissions, a Madrid-based group known as Iosco that harmonizes market rules, may propose final guidelines improving transparency and oversight of benchmarks.” I guess they’ll make the poll-based benchmarks more like the trade-based benchmarks? Which were also manipulated? Read more »

  • 12 Jun 2013 at 8:45 AM

Everybody Always Manipulated Everything, Basically

When I was growing up the phrase “market manipulation” really meant something. To be a “market manipulator” in the grand style you needed to corner a market, or pump and dump, or organize a bear raid, or do some other cigar-chompy mustache-twirly 1920s-y thing, I don’t know, it was never really my thing. But there was always a sub-manipulation category of just, like, trader skulduggery. Trading is about eking out tiny advantages over your counterparties by any means that you plausibly think might be legal, and the occasional pounding of the close or conducting of imaginary negotiations was all part of the game. “He’s a scumbag, but he’s our scumbag” was a genuine compliment.

The Libor manipulation scandal has really messed with that, huh? For one thing, Libor manipulation was a pretty uninspired brand of manipulation; all you had to do to manipulate Libor higher was to say “hi our Libor is higher.” Not a lot of imagination there. For another thing, it’s so obviously bad that anyone can understand it and get mad about it. “Wait, you just lied about an imaginary number and made billions of dollars at the expense of now-bankrupt municipalities? You really suck, you know that?” said everybody, basically. Then they all sued.

Which is all bad enough but the real problem is that now every bit of garden-variety scumbaggery immediately gets branded manipulation. And then investigated and, like, reformed and stuff. Today, for instance, there is this Bloomberg article about how FX traders manipulated the WM/Reuters close in certain currencies to basically clip a little bit of money off of clients who had put in orders to execute at that fixing: Read more »

Here’s a fun Libor lawsuit: the ghost of problematic former hedge fund FrontPoint is suing the Libor banks for (1) selling FrontPoint some interest-rate swaps and (2) manipulating Libor in a way that hosed FrontPoint on those swaps. Here is the complaint and here is Alison Frankel on the legal issues, which are interesting and which we can talk about a little below.1

Up here let’s talk about the trades that FrontPoint (and Salix Capital, which now owns these claims) is suing over. They’re interest rate swaps, of course, where FrontPoint received Libor, and where Libor was systematically manipulated lower by banks looking to enhance confidence in themselves by showing lower funding costs. But those swaps were part of a larger negative-basis package trade where (1) FrontPoint bought bonds (funded at a spread to Fed Funds), (2) FrontPoint bought CDS from a bank to hedge credit, and (3) FrontPoint entered into a swap with the bank to hedge interest rates. Schematically, when everything cancels, it looks like this:

If you asked FrontPoint what the trade was they might say “we are betting that the negative basis in these bonds will converge, making the bonds worth more relative to the CDS,” or alternately, that they would just ride the trade to maturity, getting paid that negative basis, and “earn a risk-free return by buying and selling the same credit exposure via alternative instruments in different markets.” That’s what the trade is primarily about: that orange thing in the lower-right-hand corner labeled “(Basis).” Read more »

I’ve occasionally pointed out that one problem with the antitrust Libor lawsuits is that the allegations are mostly “the banks lied about Libor in order to trick each other about their creditworthiness and/or screw each other on some swaps trade,” so it’s hard to claim that they were all working together in a big antitrust conspiracy. But Judge Naomi Reice Buchwald, who mostly dismissed a batch of Libor lawsuits on Friday, has an even better objection, which is that even if it was a conspiracy, it was supposed to be a conspiracy:

[T]he process of setting LIBOR was never intended to be competitive. Rather, it was a cooperative endeavor wherein otherwise-competing banks agreed to submit estimates of their borrowing costs to the BBA each day to facilitate the BBA’s calculation of an interest rate index. Thus, even if we were to credit plaintiffs’ allegations that defendants subverted this cooperative process by conspiring to submit artificial estimates instead of estimates made in good faith, it would not follow that plaintiffs have suffered antitrust injury. Plaintiffs’ injury would have resulted from defendants’ misrepresentation, not from harm to competition.

As Judge Buchwald points out, in a delightfully sensible 161-page opinion, antitrust violations require a competitive market that can be subverted by a conspiracy. Here, there was no competitive market to subvert, and the injury that the plaintiffs suffered – manipulated Libors – could have come as easily from individual bank manipulation as from a grand conspiracy. Normal markets don’t work that way: if I just decide to charge you twice the going rate for my product, and no one else does, that tends not to work. If I submit twice the real rate for my Libor, and no one else does, that kind of still works, though I guess it works better if everyone joins in.

So, so much for antitrust. Read more »