Download Investigators probe $500tn interest rate swaps market

Investigators probe $500tn interest rate swaps market - FT.com
http://www.ft.com/intl/cms/s/0/8822b8dc-ffac-11e4-8c46-00144feabdc0...
May 21, 2015 5:25 pm
Philip Stafford in New York
If banks thought Wednesday’s settlement over foreign
exchange manipulaton would help them draw a line under
allegations of benchmark rigging, there was a nasty surprise
buried in one of the settlements Barclays inked with a US
derivatives regulator.
The UK bank became the first institution to be fined over
allegations it manipulated Isdafix, a key interest rate swaps
benchmark, in a five year-period between 2007 and 2012.
©Bloomberg
The $115m fine Barclays paid to the Commodity Futures Trading
Commission over Isdafix was a footnote to the $5.6bn in fines paid by six banks for rigging forex. But
the sudden appearance of the settlement after a two-year investigation indicates that the swaps
index may turn out to be next big benchmark scandal.
Isdafix is used by traders to set the prices for interest rate swaps, a $500tn market. Swaps are
commonly used by banks, corporations, and asset managers for hedging potential exposure to rate
moves.
In the wake of the Libor rate rigging scandal, global regulators, led by the CFTC, have been
investigating a variety of benchmarks, including Isdafix. Authorities have subpoened information
from 16 global investment banks and ICAP, the UK interdealer broker. ICAP said on Wednesday the
regulatory investigation was ongoing.
Last year, the CFTC notified the US justice department that it had found possibly criminal behaviour
in the Isdafix investigation. Since then the DoJ has been looking into the matter, people familiar
1 of 3
5/21/2015 2:06 PM
Investigators probe $500tn interest rate swaps market - FT.com
http://www.ft.com/intl/cms/s/0/8822b8dc-ffac-11e4-8c46-00144feabdc0...
with the case said.
“I think that Barclays is just the tip of several fines on Isdafix. Isdafix may become very large, as
swaps are a very large market too. Maybe fines will not be bigger than the foreign exchange fines, but
I expect they could still be very big,” says Rosa Abrantes-Metz, managing director of Global
Economics Group, an economic analysis company.
Like Libor before the scandal, the Isdafix price was set daily by asking banks to submit their
estimated prices rather being baseed on actual trades. Ms Abrantes-Metz has been studying bank
submissions to the benchmark to help lawyers build a civil claim against banks.
“Our pursuit of benchmark manipulation started with the Libor investigation, but it did not stop
there,” said Aitan Goelman, CFTC’s head of enforcement, on Wednesday. “We will continue to look
at benchmark integrity.”
The CFTC said traders at Barclays sought to rig the Isdafix benchmark to benefit the bank’s own
derivative positions, sometimes at the expense of the bank’s counterparties and customers.
Interest rate swaps allow two parties to exchange one stream of interest payments for another, over a
set period of time. At the end of 2014 the notional amount of outstanding interest rate contracts in
the market totalled $505tn, around 80 per cent of the global swaps market, according to figures
from the Bank for International Settlements.
Isdafix prices are also used to settle interest rate swaps futures contracts traded on the Chicago
Mercantile Exchange, the world’s most liquid futures market.
For the period in question the benchmark was owned by the International Swaps and Derivatives
Association, an industry trade body, although it is now overseen by Intercontinental Exchange, a US
derivatives bourse.
If other banks are implicated in the alleged market manipulation, the outcome could be more heavy
fines.
The CFTC said in its case against Barclays that it found emails and audio recordings that were
evidence of rigging. One email from a Barclays interest rate options trader referred to the risk that
“sometimes Isdafix is manipulated”, the regulator said.
At one point in 2008 a New York-based Barclays swaps trader congratulated a colleague on his
efforts. “You did well at the 11 o’clock fix, man” and it “sounded like you were actually holding the
spreads up with your hands; like, it felt like you were bench pressing them over your head.”
Barclays’s traders also described the notional amounts they were willing to spend as “ammo” to “get
the print” or “affect” the “fix”.
2 of 3
5/21/2015 2:06 PM
Investigators probe $500tn interest rate swaps market - FT.com
http://www.ft.com/intl/cms/s/0/8822b8dc-ffac-11e4-8c46-00144feabdc0...
Additional reporting by Gina Chon in Washington
www.ft.com/tradingroom
RELATED TOPICS
Printed from: http://www.ft.com/cms/s/0/8822b8dc-ffac-11e4-8c46-00144feabdc0.html
Print a single copy of this article for personal use. Contact us if you wish to print more to distribute to others.
© THE FINANCIAL TIMES LTD 2015 FT and ‘Financial Times’ are trademarks of The Financial Times Ltd.
3 of 3
5/21/2015 2:06 PM