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CFTC charges ICAP with manipulation of Yen LIBOR

The US Commodity Futures Trading Commission (CFTC) has brought and settled charges against ICAP Europe Limited for manipulation and attempted manipulation of the London Interbank Offered Rate (LIBOR) for Yen. 

LIBOR is a critical benchmark interest rate used throughout the world as the basis for trillions of dollars of transactions.  ICAP is a subsidiary of UK-based ICAP plc.
The CFTC’s order finds that for more than four years, from at least October 2006 through at least January 2011, ICAP brokers on its Yen derivatives and cash desks knowingly disseminated false and misleading information concerning Yen borrowing rates to market participants in attempts to manipulate, at times successfully, the official fixing of the daily Yen LIBOR.  ICAP brokers, including one known as “Lord LIBOR” or “Mr. LIBOR,” did so to aid and abet their highly valued client, who was a senior Yen derivatives trader employed at UBS Securities Japan and later at another bank, in his relentless attempts to manipulate Yen LIBOR to benefit his derivatives trading positions tied to this benchmark.  On limited occasions, ICAP Yen brokers engaged in this unlawful conduct to benefit other derivatives traders as well. 
The order requires ICAP, among other things, to pay a USD65m civil monetary penalty, and cease and desist from further violations as charged.  Pursuant to the order, ICAP and ICAP plc also agree to take specified steps to ensure the integrity and reliability of benchmark interest rate-related market information disseminated by ICAP and certain other ICAP plc companies. 
“ICAP and other interdealer brokers are expected to be honest middlemen,” says David Meister, the CFTC’s director of enforcement.  “Here, certain ICAP brokers were anything but honest.  They repeatedly abused their trusted role when they infected the financial markets with false information to aid their top client’s manipulation of LIBOR.  As should be clear from today’s action, any market participant who seeks to undermine the integrity of a global benchmark interest rate must be held accountable.”
Yen LIBOR is fixed daily based on rates contributed by panel banks for Yen LIBOR that are supposed to reflect each bank’s assessment of costs of borrowing unsecured funds in the London interbank market.  ICAP, as an interdealer broker, intermediates cash and LIBOR-based derivatives transactions between banks and other institutions.  As a service to clients and to solicit and maintain business, ICAP also provides banks with market insight, including projections of likely LIBOR fixings, which are implicitly represented as ICAP’s unbiased assessment of borrowing costs and market pricing based on objective, observable data, some of which was uniquely in ICAP’s possession. 
According to the CFTC’s order, the UBS senior Yen trader called on ICAP Yen brokers more than 400 times for assistance in manipulating Yen LIBOR.  ICAP brokers often accommodated the requests by issuing, via a Yen cash broker, group emails to panel banks and others containing “suggested LIBORs” for Yen LIBOR.  But rather than providing an honest and objective assessment of how Yen LIBOR would fix, the suggested LIBORs reflected the preferred rates that would benefit the senior Yen trader.
The order finds that almost all of the Yen LIBOR panel banks received the suggested LIBORs, and several relied on them in making their Yen LIBOR submissions, particularly during the financial crisis of 2007 to 2009.  Even panel banks that tried to make truthful Yen LIBOR submissions may have passed on false or misleading submissions, because they used ICAP brokers’ purportedly unbiased Suggested LIBORs to inform their LIBOR submissions.   
According to the order, the ICAP brokers referred to the panel bank submitters as “sheep” when they copied the Yen cash broker’s suggested LIBORS.  In fact, the order finds that at least two banks’ submissions mirrored the suggested LIBORs up to 90 per cent of the time.
The order further finds that the ICAP Yen Brokers provided these “LIBOR services” to keep the senior Yen trader’s business, which accounted for as much as 20 per cent of the Yen derivatives desk’s revenue.  “Mr. LIBOR,” the Yen cash broker who disseminated the false suggested LIBORs, demanded compensation from the Yen derivatives desk for his “LIBOR services” or “no more mr libor.”  This grew from dinners and champagne, to additional commission-generating trades, to “kick backs” totalling USD72,000. 
The order further finds that this unlawful, manipulative conduct continued for more than four years, in part because ICAP’s supervision, internal controls, policies and procedures were inadequate. For example, ICAP never audited the Yen derivatives desk and left compliance oversight to the Yen derivatives desk head, who was complicit in the misconduct.
In addition to imposing a USD65m penalty, the CFTC order requires ICAP and ICAP plc to implement and strengthen internal controls, policies and procedures governing benchmark interest rate-related market information that ICAP and certain ICAP plc companies send to market participants. 
In a related action, the United Kingdom Financial Conduct Authority (FCA) issued a Final Notice regarding its enforcement action against ICAP Europe Limited and imposed a penalty of GBP14m, the equivalent of approximately USD22.4m.

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