Cheng
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I was on holiday for two weeks, not reading much news and came back to see Diamond resign over some accusations of manipulating LIBOR. Now, without going through all the noise and details, what the heck is the issue here ?
It looks like Barclays rates traders submitted knowingly too high / too low quotes to the BBA. How do people know they were off and not arm's length prices ? What is the damage they caused (taking into account that LIBOR is an average over a couple of quotes and that outliers are removed before averaging your quote can't be off too far, otherwise it gets deleted, but this way your impact should be rather limited) ?
Sorry if I ask obvious stuff but I keep scratching my head what exactly the issues are (apart from the political dimension including bankster bashing and the search for a scapegoat). |
"He's walking like a small child / But watch his eyes burn you away / Black holes in his golden stare / God knows he wants to go home / Children of the damned"
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goldorak
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| While we are at it, if someone could kindly explain to me how you can rig Libor on your own without a real coordinated conspiracy? As far as I know Libor is based on quotes whose extreme quartiles have been removed and the remaining half of the quotes being averaged. How can you make a real difference on your own? To have a real impact you need to quote a large/low rate but then you would have a material probability of being in the upper/bottom quartile. Someone? |
If you are not living on the edge you are taking up too much space. |
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Cheng
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| Precisely my point. After averaging your impact should be below 1bp I would guess. |
"He's walking like a small child / But watch his eyes burn you away / Black holes in his golden stare / God knows he wants to go home / Children of the damned"
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Scotty
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Two things somewhat connected things seemed to be happening.
Firstly, the submitters in the banks were submitting their quotes according to the wishes (is positions) of their fellow traders rather than at their expcted offer rates.
Secondly, there seems to have been collusion between banks, judging by the interesting emails. |
“Whatever you do, or dream you can, begin it. Boldness has genius and power and magic in it.” |
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I have seen allegations of collusion, but beyond BOE asking Barclays to set their rates lower, I haven't seen anything to back it up. Scotty, am interested if you have a link, I've been trying to understand the collusion accusation specifically. Lots of lay people are saying it was collusion, not understanding that all banks submit rates, and that there is a common incentive to submit lower rates, which does not imply collusion.
It can just be plain old fraud, but there's a lot I don't really understand. BBA is private, LIBOR is private, and the contract details are all private. Fraud can be the only criminal allegation, otherwise i don't see how any of it was illegal.
Proving fraud is going to be hard even if everyone knows it. Is it fraud if my bid/offers are thrown out? Is it fraud if I am consistently the lowest (JPM) or highest (Barclays)?
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in the words of one such quant ‘were on the whole either less quanted or
not quanted at all’. |
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So top Barclays echelon (Diamond, Agius, Missier) simultaneously resign & firm agrees to pay record $453MM fine... all based on fluff? This situation is rotten, and the majority of Barclays board/large investors knew it (hence the quick axes to redirect pressure).
FinTimes...
"While attention has focused on alleged efforts by banks to lower their Libor submissions during the financial crisis, an array of emails from traders at Barclays in 2005 and 2006 reveal their efforts in trying to manipulate the benchmark to boost trading profits and minimise payments linked to swap contracts.
This includes so-called “reset risk” linked to outstanding swaps, the settlement of quarterly and monthly interest rate futures contracts with Libor and using inside information for swap trades that profit from dislocations between various Libor maturities.
The Department of Justice cites an example of reset risk from Barclays on February 22 2006: “We’re getting killed on our 3m [three-month] resets, we need them to be up this week before we roll out of our positions.”
As banks accumulate huge outstanding swap positions over time, they will be making or receiving regular payments based on three-month Libor, which is the main reference rate for swaps. This is known as “reset” risk.
“Unless you can find someone with an exact offsetting position, it’s very expensive to hedge,” says Satyajit Das, a derivatives trader turned consultant and author. “If you can’t hedge the position, the incentive structure is such that you may try and take liberties.”
Interest rate futures contracts traded on exchanges such as the CME also settle against Libor on specific dates such as the Monday before the third Wednesday of the quarter. Interest rate futures in various currencies serve a crucial role in helping swap traders hedge their short term swap positions. A trader’s exposure to futures would be helped by massaging Libor in the required direction.
The DoJ notes that on March 10 2006, a Friday, a Barclays dollar swaps trader located in London sent an email to a Barclays dollar Libor submitter.
“Hi mate[.] We have an unbelievably large set on Monday. We need a really low 3m fix, it could potentially cost a fortune.”
Swap trading based on variations between one-, three- and six-month Libor is a popular way for banks to boost their profits. A Barclays email disclosed by the Commodity Futures Trading Commission from November 22 2005 notes: “We need a 4.17 fix in 1m (low fix) We need a 4.41 fix in 3m (high fix).”
Such swap trading that revolves around specific Libor fixes now faces greater scrutiny as regulators investigate other banks." |
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goldorak
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| I am fine with all these emails and understand the point. But how the hell did they actually manage to move the Libor on their own? |
If you are not living on the edge you are taking up too much space. |
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Trader: “I really need a very very low 3m fixing on Monday – preferably we get kicked out. We have about 80 yards [billion] fixing for the desk and each 0.1 [one basis point] lower in the fix is a huge help for us. So 4.90 or lower would be fantastic”.
During period of interest (FSA notice), Barclays had been consistently submitting higher than average. Per above email excerpt, being thrown out to the bottom side altered the trimmed mean. Much of the infraction % ($453MM) revolved around this malicious outside peg to get purposefully kicked. Single basis pt was considerable $ given high build on this particular eurodollar futures book.
FSA Barclays Final Notice
As for collusion with other banks, that could be possible, but I have yet to see real public evidence. I did see this quoted on page 10 of above FSA document, however:
"On numerous occasions between January 2005 and June 2009, Barclays’ Derivatives Traders made requests to its Submitters for submissions based on their trading positions. These included requests made on behalf of derivatives traders at other banks."
I'm typically cynical of business reporting accuracy, but there is mucho ugly smoke on this one. This has been a consistent topic of discussion in trading circles, with IMM jokes and all, so it's not a huge surprise...but perhaps a "f'in finally" moment has arrived. The sudden moves at Barclay's top heirarchy is rather telling...if it was superficial, their board would have stuck by them and hunkered down.
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FDAXHunter
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There seems to be some big misunderstanding here how Libor works.
- Libor is quoted to 1,000th of a basis point (in the majors)
- On a billion USD, the value of 1 basis point is 25,000 USD (3 month floating).
- The floating exposure to a particular reset day in a bank can easily be dozens of billions. That doesn't mean that the bank will have 60 billion USD in interest rate risk, it just means that they might be net Payer on 60 billion today (07 July 2012) and net Receiver for 70 billion on Monday (16 July 2012). They are actually pretty flat in terms of interest rate risk, but they do have pretty substantial reset risk.
Therefore, today, they have a large incentive to skew the rate just a little bit down and on Monday, a little bit up.
goldorak: But how the hell did they actually manage to move the Libor on their own?
It's an average to 5 decimal places. Say for the sake of argument you just submit something that's 3 basis points out (i.e. lower). If you're still in the middle 10 quotes (roughly the 2nd and 3rd quartile) then that will skew the offical Libor by 0.3 basis points (assuming 10 inside quotes). And 0.3 basis points on 60 billion USD is 450,000 USD.
If you're talking about another Libor with fewer banks (like CHF Libor) then your 3 basis points skew will translate into 56,250 CHF (per billion CHF), again assuming you don't get eliminated. If you get eliminated, that's even better (although we don't know our exact impact then).
Now, that's our reset risk for today only (we're net payers). Tomorrow will be another reset and we might be net receiving. The day after we might be net receiving and then we might be a net Libor payer for a week. In any case, because the numbers are very large nearly every day, this can quickly add up to a very significant amount of risk... or profit, if you manage to be on the right side.
Anyway, the idiotic thing is that nobody inside the financial world actually assumed that Libor was ever not really manipulated (ask any swaps trader. Seriously.). So in a way this is somewhat amusing. And because everybody is trying to skew it in a slightly different way, then this sort of cancels out in the long run.... except when you have a few large panel banks acting in collusion (which was also normal, but whatever).
The "collusion" follows easily enough: Tomorrow is Thursday, and you might not be a significant payer or receiver on that day (maybe like pay on 4 billion, which is nothing). But, our friends at Barclays might be big time receivers tomorrow (like 100 billion). So, if they put in a higher quote, and you put in a higher quote... then that would be a big help for them, while not hurting you at all.
Edit: Crossed post with ESMaestro |
Salman Pushdie |
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goldorak
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> Libor is quoted to 1,000th of a basis point (in the majors)
This explains that! I completely ignored that. Shame on me.
Thx a lot for the detailed explanation FDAX and ESMaestro. Very enlightening indeed. |
If you are not living on the edge you are taking up too much space. |
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goldorak
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Actually when I read
> Swap trading based on variations between one-, three- and six-month Libor is a popular way for banks to boost their profits. A Barclays email disclosed by the Commodity Futures Trading Commission from November 22 2005 notes: “We need a 4.17 fix in 1m (low fix) We need a 4.41 fix in 3m (high fix).”
It looks like the game was not about the 5th decimal only.
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If you are not living on the edge you are taking up too much space. |
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FDAXHunter
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I gave an example of about 0.3 bps, which, pre-credit crisis was maybe the most you could expect. Maybe 1 bps, if you really, really went for it.
Here is the respective data for the 5 days surrounding the 2005-11-22 (the date in question).
| Date | Libor USD 1M | Libor USD 3M |
| 2005-11-24 | 4.20000 | 4.40000 |
| 2005-11-23 | 4.19125 | 4.39000 |
| 2005-11-22 | 4.19375 | 4.39375 |
| 2005-11-21 | 4.17000 | 4.38000 |
| 2005-11-18 | 4.16563 | 4.37250 |
As you can see, nothing "4.17 in 1 month", "4.41 in 3 month". Maybe that's what the trader would have liked (actually he probably would have liked "44.10 in 3 month") but that doesn't mean he was going to get it...
Also note that the fixing rate maybe varies by 1 bps/day.
Maybe in more true NP fashion, maybe we can stop quoting out-of-context quotes from the rainbow press (in which I definitely include any and all pieces of financial journalism). Resorting to financial journalists for information tends to be a good way to randomize things. |
Salman Pushdie |
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FDAXHunter
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Which reminds me: to illustrate how common knowledge this was I'd like to point to this post by Andym in Heard on the Trading Floor
Posted: 2008-04-16 15:46
Today's story about the BBA getting tough with banks who misquote LIBOR puts me in mind of this old convo:
Irate counterparty: "Your LIBOR rates are a load of crap"
Money market guy: "Don't complain to me; our swap traders contribute the rates"
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Salman Pushdie |
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"
It can just be plain old fraud, but there's a lot I don't really understand. BBA is private, LIBOR is private, and the contract details are all private. Fraud can be the only criminal allegation, otherwise i don't see how any of it was illegal.
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This doesn't get talked enough about. I get the manipulation, etc but I'm hearing things like Chinese walls were broken. What Chinese walls were ever in place between money markets and swaps traders (granted, they may be there now). I'm just curious as to which rule/law was specifically broken. I think it's a slightly moot point, not condoning the behavior, but curious how regulators will press on because they're hovering over many major banks in this matter.
I mean, the freedom-of-speech excuse worked for the ratings agencies :-) |
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umarmung
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I don't think there's much the UK regulators can do even now - that's one of the points from this debacle.
As for fraud charges, I'm no lawyer, but there is plenty there if other branches of the government really want to pursue it and have the evidence to back it:
- Theft Act 1968, Section 16: False accounting.
- Theft Act 1968, Section 17: Obtaining a Pecuniary Advantage by Deception.
- Fraud Act 2006, Section 4: Fraud Abuse by Position.
There may also be applicable Market Abuse sections from FSMA 2000.
Also, interesting how much stress there has been over this when the same or worse has been going on in modern finance for decades, especially derivative and FX fixings.
As for the latest LIBOR scandal, ground zero was most certainly not Barclays, but more like RBS a few years prior. You can even see the trail of destruction being caused by specific individuals as they move from bank to bank from financial journalist pieces, let alone trader circles. |
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quantie
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Fx fix gets run over but there are trades underlying it so yes it gets skewed but it is not a made up number. Libor is at best a guess, the issue is where banks fund themselves is determined by treasury and there is supposed to be a Taiwanese sea in between them and the trader running the swaps book or the deriv trader who has fixes for his libor range accruals.
Needless to say I never understand why people bother with fixes to get benchmark/best execution (fx) nor do I understand why investors use bank algos to execute large trades. Either you build it yourselves or pay someone explicitly for it.. |
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AndyM
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A few thoughts:
Pre-08, we are talking small margins, but as Fdax demonstrated, it can add up. However, in practice, it probably wouldn't, because the banks are by and large nicking each other. OK, if you're a non-panel bank, and you have zillions of resets with panel banks, then you can get done, but then if you don't account for this factor, you're a fool.
This sort of thing was absolutely ubiquitous. In fact, I can prove it. Assume only one bank is messing around, and the others started off pure as the driven snow. After being nicked a few times, the virgins get wise; at this stage they can complain to the authorities with no proof and little chance of getting a result (note, these investigations took years and 100s of millions of dollars to resolve), or you decide to play the same game. In equilibrium, everyone is doing it. QED.
Now, there are different degrees of this. I think in most cases, we are talking about a situation where a bank's submission could be anywhere between x and y, given uncertainty and illiqudity. Swaps desk asks if, in that case, could money market desk pls submit closer to x than y. This seems to me to be at best a misdemeanour, if that, but maybe I suffer from some moral lacuna here.
Worse would be if bank is actively bidding x>y, and they submit y on behalf of their swaps desk.
Even worse would be a collusive scheme between banks.
(Bear in mind that another fruitful avenue would be manipulation of the underlying cash market, which would have been very feasible in certain currencies where the cash mkt is controlled by few banks).
Post-Lehman, the situation is different; here we have potentially no market, as in ZERO, and the banks have to submit rates. Well, in this case low is better than high, so...BARC actually tried to do the right thing, and the mkt bit their heads off for the trouble. Also, there was an economic war being fought, and the first casualty of war is truth...so I'm not going to get too bent out of shape by this white lie.
All this has been known for years in the market and for at least four years in the broader investment community due to countless press articles highlighting same. The outpouring of vitriol over this matter now seems more related to the fact that there is plenty of dry kindling around, so it only takes a spark to start a conflagration.
The supreme irony is that BARC behaved better than their rivals. Firstly, they tried to set their LIBORs more realistically post-LEH, and complained to the authorities about their rivals' misrepresentations, and got rebuffed. Secondly, they conducted a thorough internal investigation and were completely open with the authorities, choosing to settle early to get a £25m discount (a decision which cost them $5bn of mkt cap, CEO, COO and Chairman...maybe not the wisest in retrospect).
Whatever they were up to, rival banks were worse, which makes it odd that they have been heaped with opprobrium for essentially coming clean. Maybe buy BARC, sell panel is a decent trade here?!
Bottom line for me: all this shit went on for a long time. It's not big, and it's not clever, and it's not ethical. But in the scheme of things, when I weigh this up against the rampant self-dealing, conflicts of interest etc, that are at the heart of investment banks' business models, I can't get too exercised about this. Compare this to subprime shenanigans, or even everyday ongoing conflicts in underwriting, research, market-making, structured products etc etc, and I struggle to get overly exercised about this. |
I used to be disgusted; now I try to be amused... |
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| I am in general agreement w/AndyM above. However, there is one thing that is likely to come out of it, exercised or not, and that thing is an almighty lawsuit. And yeah, it's ironic, in light of the fact that Barclays has taken the biggest reputational hit (so far), in spite of trying to do the right thing throughout. |
Insofar as I may be heard by anything, which may or may not care what I say, I ask, if it matters, that you be forgiven for anything you may have done or failed to do which requires forgiveness... |
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Hansi
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It's fine, they've remedied the issue :)
http://www.cnbc.com/id/48353891/ |
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pj
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| would luv to watch that video... |
вакансия "Программист Психологической службы"
-але! у нас ошибко! не работает бля-бля-бля
-вы хотите об этом поговорить? |
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arkestra
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Barclays has taken the biggest reputational hit (so far), in spite of trying to do the right thing throughout.
Post-Lehman's yeah - I really can't see a problem with Barcap's behaviour there either.
But pre-Lehman's behaviour is a different story. And I think it's the pre-Lehman's behaviour on everyone's part that the regulators are gutting people for (in lavish slow motion, pretty much everywhere, and for some time to come). Not everyone was in some kind of full equilibrium of terminological inexactitude back then, though I agree with Andy that the whole setup fostered dishonesty. |
Down pokey quaint streets in Cambridge / Cycles our distant spastic heritage |
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