This article considers some of the implications of the LIBOR interbank interest rate-rigging scandal in which a number of top-flight banks have been implicated.

Editor’s note: This article considers some of the implications of the LIBOR interbank interest rate-rigging scandal in which a number of top-flight banks have been implicated. The article is by Owen Watkins, barrister in the corporate team of law firm Lewis Silkin. While the case examines a number of UK examples, the use of LIBOR and other benchmarks in Asia means that the issues here are relevant as much in the Asia-Pacific region as they are elsewhere. This publication is pleased to share these views with readers, but as ever does not necessarily endorse the views of the article.

On 6 February, the Financial Services Authority, the US Commodity Futures Trading Commission and the US Department of Justice announced significant fines on Royal Bank of Scotland for manipulating various London Interbank Offered Rate benchmarks. In total, the fines amounted to $612 million, of which the FSA share was £87.5 million ($137 million). These are significant amounts, and there are very good reasons why the fines were so severe.

LIBOR is the most frequently used benchmark for interest rates globally, referenced in transactions with a notional outstanding value of at least $500 trillion. It is also by far the most prevalent benchmark rate used in over-the-counter interest rate derivatives contracts and exchange-traded interest rate contracts. LIBOR is therefore a cornerstone of the global financial system. In brief, LIBOR represents the average rate for a particular currency and a particular time period that banks pay to borrow from one another, and its formulation is contributed to each and every business day by banks on the relevant LIBOR panel – known as “contributing banks” – submitting the rates they think they would have to pay. RBS is, in fact, the third bank to be fined for LIBOR manipulation - following Barclays (total fines $450 million) and UBS (total fines $1.5 billion) – and the account of RBS's misconduct set out by the regulators is very similar to that seen already in the Barclays and UBS cases. In what the DoJ described as “a stunning abuse of trust”, LIBOR submissions made by RBS were designed to benefit its own trading book, rather than being an independent assessment of the market. RBS derivatives traders openly canvassed those tasked with submitting LIBOR rates on behalf of the bank to submit higher or lower rates depending on what would benefit their positions.

In some cases, the derivatives traders would also act as the rate submitters – a clear conflict of interest which RBS did nothing to resolve. Furthermore, there appears to have been a network of individuals outside RBS who colluded with RBS derivatives traders to persuade other banks on LIBOR panels to make LIBOR submissions that would benefit RBS derivatives positions.

Surprising

Given that RBS was a major financial institution, and thus on the FSA’s risk-based approach requiring close supervision with frequent monitoring visits, it is surprising (to put it no higher) that the FSA failed to pick up the abuse earlier, particularly as certain aspects of it would have been fairly obvious, such as the close physical proximity between LIBOR rate setters and derivatives traders and the frequent contact between them. Be that as it may, the level of the fines – in the FSA's case, the three largest it has imposed – shows the seriousness with which the regulators regard what went on. Given the importance of LIBOR to the workings of the global financial markets, any attempt to undermine the integrity of LIBOR undermines the financial system generally, and thus in the eyes of regulators merits an appropriately heavy penalty. RBS has clearly suffered some reputational damage as a result of its actions in relation to LIBOR. Yet the signs are that, like UBS, its behaviour has attracted far less attention than that of Barclays, which was the first to settle with regulators. Barclays may have hoped for some sort of "first mover advantage" and to pick up credit for its cooperation with the regulators. Yet in practice it received little or no positive publicity for doing so, as the press concentrated on the more salacious details (such as offers of champagne for co-operating in manipulating rates) and the departure of its then chief executive, Bob Diamond, which kept the story alive for several days.

Indeed, by being the first to admit to manipulation, Barclays may paradoxically have suffered all the bad publicity for its behaviour, while reducing the effect of an admission of wrongdoing by those who settled later (on the basis that the popular view, formed by Barclays' actions, was that “this is what all banks do”, and would move swiftly on). One wonders whether, knowing what they now know, Barclays would have acted differently.

Although RBS is the latest bank to face penalties arising from LIBOR manipulation, it is unlikely to be the last. The regulators are pursuing other major financial institutions and we can expect further announcements in the coming months.

In addition, the regulators are taking action against the main individuals involved in the rate fixing; on the basis of the penalties imposed on the firms, it is likely that these individuals face heavy fines and a ban from the industry. This story therefore has some considerable way yet to run.