The LIBOR Scandal_The Asian Impact
2
INSURANCE & REINSURANCE THE LIBOR SCANDAL – THE ASIAN IMPACT SEPTEMBER 2012 The LIBOR storm broke across the financial world with a record FSA fine for Barclays Bank and the enforced resignation of its Chief Executive Bob Diamond and other senior managers. Barclays was fined a total of £290 million by regulators in the UK and the US. This includes a fine of £59.5 million by the FSA – the largest it has ever levied. Regulators have not been idle and now 16 other financial institutions are under investigation in UK, Europe, USA, Singapore, Japan and Korea. Background Libor is the interbank lending rate which is set in London every day on the basis of information from the leading banks about their own interbank lending rates; the highest and lowest rates are discounted and the remaining rates averaged to obtain the day’s LIBOR rate. LIBOR directly impacts an estimated £300 trillion of financial instruments and deals between banks and other institutions. A similar system is used to fix the Euro Interbank Offered Rate or EURIBOR, which is also said to have been manipulated by the banks. In Asia, it is called SIBOR in Singapore, HIBOR in Hong Kong and TIBOR in Japan. During the financial crisis of 2007/8, Barclays is said to have put in low figures for its own interbank rate in order to avoid suspicion that it was under financial stress and thus having to borrow at a higher rate than its competitors. It is suggested that Barclays may have (mistakenly) believed that the Bank of England supported this activity in order to try to protect the UK banking system through the financial crisis. In addition, traders in the bank lobbied the staff responsible for submitting figures for the daily Libor fixing to put in figures which would benefit their trading position and enable them to realise a profit which might not otherwise have been available. It is suggested also that attempts by Barclays traders to manipulate LIBOR date back to at least 2005. It was not until an article in the Wall Street Journal in May 2008, however, that questions began to be asked publically about the setting of LIBOR. Shortly afterwards, in June/July 2008, banks received the first requests for information from Japanese, European, US and UK regulators. These were followed by formal requests for information by way of subpoenas in July 2010. In November/ December 2010, and throughout 2011, a number of employees of the banks under investigation either resigned or were dismissed, allegedly because of their role in the Libor fixing process and, in June 2012 the first formal fines were announced by UK and US regulators. What will all this mean for insurers? At this stage it is not entirely clear who will have lost what as a result of the attempted manipulation of LIBOR, EURIBOR and similar international benchmarks – new information is continuing to emerge and it may not be possible to understand the position clearly until the investigations into the other banks have been completed both in the UK and overseas. Some commentators have suggested that insurers of the banks and other financial institutions involved with LIBOR, EURIBOR and their equivalents may face claims on a number of fronts including: > defence costs of regulatory investigations and public enquiries; > shareholder actions; > crisis management, public relations, brand management and other forms of mitigation; > alleged collusion, manipulation and anti-competitive behaviour by the banks; and > employee related law suits including whistleblowing allegations. While some insurers have already been paying defence costs for the multi-jurisdictional regulatory investigations, it remains to be seen whether the attempt to manipulate LIBOR and its equivalents has caused wide spread or profound loss to third parties. Recent law suits for loss of interest on products that depended on a high interest rate may be taken more seriously. Each potential claim should be reviewed on its merit and facts and individually analysed in the context of the economic circumstances existing at the time of any alleged loss.
-
Upload
neha-agarwal -
Category
Documents
-
view
3 -
download
0
description
document
Transcript of The LIBOR Scandal_The Asian Impact
INSURANCE & REINSURANCETHE LIBOR SCANDAL – THE ASIAN IMPACTSEPTEMBER 2012
The LIBOR storm broke across the financial world with a record FSA fine for Barclays Bank and the enforced resignation of its Chief Executive Bob Diamond and other senior managers. Barclays was fined a total of £290 million by regulators in the UK and the US. This includes a fine of £59.5 million by the FSA – the largest it has ever levied.
Regulators have not been idle and now 16 other financial institutions are under investigation in UK, Europe, USA, Singapore, Japan and Korea.
BackgroundLibor is the interbank lending rate which is set in London every day on the basis of information from the leading banks about their own interbank lending rates; the highest and lowest rates are discounted and the remaining rates averaged to obtain the day’s LIBOR rate.
LIBOR directly impacts an estimated £300 trillion of financial instruments and deals between banks and other institutions.
A similar system is used to fix the Euro Interbank Offered Rate or EURIBOR, which is also said to have been manipulated by the banks.
In Asia, it is called SIBOR in Singapore, HIBOR in Hong Kong and TIBOR in Japan.
During the financial crisis of 2007/8, Barclays is said to have put in low figures for its own interbank rate in order to avoid suspicion that it was under financial stress and thus having to borrow at a higher rate than its competitors. It is suggested that Barclays may have (mistakenly) believed that the Bank of England supported this activity in order to try to protect the UK banking system through the financial crisis.
In addition, traders in the bank lobbied the staff responsible for submitting figures for the daily Libor fixing to put in figures which would benefit their trading position and enable them to realise a profit which might not otherwise have been available.
It is suggested also that attempts by Barclays traders to manipulate LIBOR date back to at least 2005. It was not until an article in the Wall Street Journal in May 2008, however, that questions began to be asked publically about the setting of LIBOR.
Shortly afterwards, in June/July 2008, banks received the first requests for information from Japanese, European, US and UK regulators. These were followed by formal requests for information by way of subpoenas in July 2010. In November/ December 2010, and throughout 2011, a number of employees of the banks under investigation either resigned or were dismissed, allegedly because of their role in the Libor fixing process and, in June 2012 the first formal fines were announced by UK and US regulators.
What will all this mean for insurers?At this stage it is not entirely clear who will have lost what as a result of the attempted manipulation of LIBOR, EURIBOR and similar international benchmarks – new information is continuing to emerge and it may not be possible to understand the position clearly until the investigations into the other banks have been completed both in the UK and overseas.
Some commentators have suggested that insurers of the banks and other financial institutions involved with LIBOR, EURIBOR and their equivalents may face claims on a number of fronts including:
> defence costs of regulatory investigations and public enquiries;
> shareholder actions; > crisis management, public relations, brand management
and other forms of mitigation; > alleged collusion, manipulation and anti-competitive
behaviour by the banks; and > employee related law suits including whistleblowing
allegations.
While some insurers have already been paying defence costs for the multi-jurisdictional regulatory investigations, it remains to be seen whether the attempt to manipulate LIBOR and its equivalents has caused wide spread or profound loss to third parties. Recent law suits for loss of interest on products that depended on a high interest rate may be taken more seriously. Each potential claim should be reviewed on its merit and facts and individually analysed in the context of the economic circumstances existing at the time of any alleged loss.
What is the impact in Asia?Singapore was one of the first Asian countries to hit the spotlight when news broke out on 23 August in the Business Times as follows:
“Ex-RBS man gives LIBOR setting a S’pore twist”.
This lawsuit, first filed in late 2011, by a former global banking and marketing division head of RBS, Tan Chin Min, has highlighted RBS’s practices in setting the London Interbank Offered Rate.
Tan Chi Min, has alleged in his suit against the bank in the Singapore High Court, that he was wrongfully dismissed for alleged gross misconduct related to the setting of LIBOR for the Japanese yen, in order to deflect the bank’s responsibility over the LIBOR affair.
The Bank’s defence was that Tan Chi Min had tried to influence RBS’s rate setters to submit LIBOR rates at certain levels in order to boost their profits.
There was apparently an internal disciplinary hearing in September 2011 wherein Tan Chi Min had discussed RBS’s internal procedures about setting the LIBOR rates in London. In his court papers, he said that the minutes of this disciplinary hearing did not reflect the discussions that “the practice of making requests to rate setters was common... and known to the bank management”. In fact the minutes showed that the bank ‘condoned the practice of making requests of its LIBOR rate setters”.
This case is still being heard at the time of the writing of this article.
In South Korea the Financial regulator has started investigations into a similar interest rate rigging action by a few Korean banks, namely Kookmin, Shinhan, Woori and Hana.
This investigation focuses on the possible collusion between financial institutions over setting CD (Certificate of Deposit) which is used as a benchmark to set lending rates.
Banks and brokerage firms gain from high CD rates as housing mortgages are linked to them.
Similar to the LIBOR rigging consequence, CD rigging can help to “flatter a companies financial health”.
There will be significant fines if the Financial regulator’s investigations find evidence of collusion.
In Japan, a report on the 10 February 2012 by the Financial Times, said that Citigroup wrote off US$50 million when two employees from its Japan units were found to influence the TIBOR.
In another matter, a non-Japanese employee of the European based HQ of Mitsubishi UFJ Financial Group, was being investigated for manipulationg the yen based LIBOR rate.
He is alleged to have submitted a lower yen LIBOR rate in February 2009 after he was encouraged to do so by an unnamed individual from another financial institution.
The FSA said that this investigation touched the yen LIBOR for the first time.
It is believed that the size of this manipulation is small.
There are differing views as to the magnitude of the anticipated claims and fines as the investigations unfold in the coming months and years.
Macquarie Research has estimated the potential legal liability of the affected banks to be US$176 billion.
Other predictions are much smaller. Morgan Stanley has predicted the payouts will only be US$7.8 billion whereas analysts at Keefe, Bruyette & Woods say it will be about US$47.5 billion.
Only time will tell.
ContactFor further information please contact:
Aruno RajaratnamFinancial Lines Group Practice Leader, Asia Ince & Co Singapore LLP [email protected]+65 6538 6660
Victoria GregoryTrainee Solicitor Ince & Co London [email protected]+44 20 7481 0010
Ince & Co is a network of affiliated commercial law firms with offices in Beijing, Dubai, Hamburg, Hong Kong, Le Havre, London, Monaco, Paris, Piraeus, Shanghai and Singapore.
E: [email protected] incelaw.com
24 Hour International Emergency Response Tel: + 44 (0)20 7283 6999
LEGAL ADVICE TO BUSINESSES GLOBALLY FOR OVER 140 YEARSThe information and commentary herein do not and are not intended to amount to legal advice to any person on a specific matter. They are furnished for information purposes only and free of charge. Every reasonable effort is made to make them accurate and up-to-date but no responsibility for their accuracy or correctness, nor for any consequences of reliance on them, is assumed by the firm. Readers are firmly advised to obtain specific legal advice about any matter affecting them and are welcome to speak to their usual contact.
© 2012 Ince & Co International LLP, a limited liability partnership registered in England and Wales with number OC361890. Registered office and principal place of business: International House, 1 St Katharine’s Way, London, E1W 1AY.
