libor manipulation: who loses? June 27, 2012
Posted by Bradley in : financial regulation , add a commentA number of comments on Robert Peston’s story about the Barclays Libor/Euribor regulatory actions ask who lost out as a result of any manipulation of the rates. During the financial crisis the impact of any manipulation was to produce lower interest rates than those which would have been produced had accurate submissions been made (because the Libor quotes are supposed to reflect the quoting banks’ cost of funds higher rates suggest the market considers the bank to be riskier than lower rates would). It looks as though Barclays wasn’t the leader in submitting low rates in this period. In this period borrowers under existing Libor-based loans would be benefiting as they would be paying lower interest rates than they would had the quotes been accurate. The Justice Department Press Release seems to me to be a bit misleading here. It quotes Assistant Attorney General Breuer as saying:
Because mortgages, student loans, financial derivatives, and other financial products rely on LIBOR and EURIBOR as reference rates, the manipulation of submissions used to calculate those rates can have significant negative effects on consumers and financial markets worldwide.
If Libor etc don’t actually reflect lenders’ cost of funds because the rate setting process manipulates the rates to a level lower than should apply, it is the lenders who suffer. So consumers suffer not because they are forced to pay higher rates than they should but because the inaccuracy of the rates means lenders are less willing to lend at prevailing rates, or suffer from financial distress because they are unable to make profits on their loans. And there are implications for interest rate swaps. But keeping Libor lower shouldn’t have had a negative impact on loan default rates. Would we all have been better off had the banks which quoted rates in the Libor/Euribor rate setting processes admitted publicly that they didn’t know what the rates should be? We’ll never know.
The manipulation to suit Barclays interest rate traders is different. Here the story is that agents of Barclays were manipulating the rates they quoted in order to allow individuals to make profits on their trading positions. And some of those making the requests for manipulation didn’t even work at Barclays, which implies that manipulation was carried out to benefit individuals rather than in the interests of Barclays. The suggestion that employees of financial firms were putting their own personal interests ahead of the interests of the firms that employed them, let alone the interests of the markets or of the taxpayers who would eventually be bailing them out, is what is most striking about this story.
For me this story justifies extreme scepticism of comments that financial firms make in the context of rule-makings about the need to ensure that regulation does not interfere in the operations of the financial markets (such as this comment by Barclays Capital on the Volcker rule proposal).
libor: cftc, doj, fsa fine barclays June 27, 2012
Posted by Bradley in : financial regulation , add a commentThe DOJ (fine: $160 million), CFTC (fine $200 million) and FSA (fine £59.5 million) announced settlements of enforcement actions against Barclays Bank with respect to manipulations of Libor and Euribor rates. Other investigations relating to Libor and Euribor involving these and other agencies are ongoing.
Barclays submitted quotes to the US dollar Libor and Euribor setting processes based on requests of its interest rate derivatives dealers, tried to influence the submissions of other banks to the Euribor (and to some extent to the Libor) setting process, and made submissions to the Libor setting process which were designed to reduce negative media perception.
The Financial Services Authority said that Barclays did not have any specific systems or controls relating to the Libor and Euribor setting processes until December 2009. The FSA’s penalty calculation reflected the following factors:
The integrity of benchmark reference rates such as LIBOR and EURIBOR is of fundamental importance to both UK and international financial markets. Barclays’ misconduct could have caused serious harm to other market participants. Barclays’ misconduct also created the risk that the integrity of LIBOR and EURIBOR would be called into question and that confidence in or the stability of the UK financial system would be threatened.
The agencies noted that Barclays co-operated in the investigation, and the FSA allowed Barclays a discount of 30% for settling at an early stage.
Although much of the speculation in the press about abuses of the libor setting process focused on the financial crisis, Barclays derivatives traders made requests to those responsible for making rate submissions going back as far as the beginning of 2005. The FSA’s final notice cites emails and instant messages by the traders, and tracks the extent to which submissions seem to have followed the email requests. This story of manipulation of the interest rate setting process and of lax compliance is shocking. And focusing on fining the corporate entity doesn’t seem to me to go far enough. The DOJ notes that its non-prosecution agreement applies to Barclays and not to the individuals involved, but I would like to be reading that the corrupt derivative traders who tried to fix interest rates to benefit themselves (and who wrote about sharing bottles of Bollinger with those who helped them) are being subjected to lifetime bans from employment in the financial markets, imprisonment, and disgorgement of their ill-gotten gains.
promoting retail investor voice? June 13, 2012
Posted by Bradley in : financial regulation , add a commentLuis Aguilar issued a public statement yesterday about the SEC’s new investor advisory committee:
The participation of retail investors in our capital markets is crucial to our country’s economic success. Yet – in contrast to many other groups that interact with the Commission – most individual investors lack the time and resources to mobilize in support of policy positions, participate in meetings with Commissioners and SEC staff, and make their needs known. Accordingly, I urge the IAC to put individual retail investors foremost in its considerations.
It will be interesting to see what this committee does. Meanwhile, Occupy the SEC suggested some tough questions the Senate Committee on Banking, Housing, and Urban Affairs might ask Jamie Dimon at its hearing today.
sec jobs act faq April 10, 2012
Posted by Bradley in : financial regulation , add a commentIs here. The SEC also published a document analysing Reg. D filings. Here’s a brief excerpt:
If there were a built-in bias against private offerings as suggested in a recent Wall Street Journal article.. it is not manifested through dominance in capital raised through public offerings or supported by current capital raising trends. Moreover, the estimated amount of capital raised through Reg D offerings in 2010 ($878 billion) is similar in magnitude to the estimated amount of capital raised in 2000 prior to start of the Sarbanes-Oxley regulatory environment ($960 billion..). In this respect, and given the pace of 2011 Reg D offerings, there is no evidence that the Reg D offering market has shrunk over this period.
council agrees short selling regulation February 21, 2012
Posted by Bradley in : financial regulation , add a commentThe text is here.
uk government consults on gender and insurance December 9, 2011
Posted by Bradley in : financial regulation, gender , add a commentThe UK is consulting on its proposed response to the Test-Achats decision. The announcement of the consultation states:
The Consultation document seeks views on the Government’s legal interpretation of the judgment and the accompanying draft regulations that amend the Equality Act. It also seeks comments on the Government’s impact assessment and requests additional data that would contribute to a better understanding of the impact on consumers and insurers. Finally, it asks for views on some of the key issues arising from the judgment, such as the scope of indirect discrimination.
spinning the financial crisis October 30, 2011
Posted by Bradley in : financial regulation , add a commentThere are unintended consequences of free markets … It’s not capitalism that has been the problem, but irresponsible governments and politicians who have allowed the financial system to explode by permitting the build-up of ludicrous amounts of debt and leverage.
Why did these irresponsible governments allow this? Because financial institutions told them too much regulation would interfere with their ability to compete with institutions based in other jurisdictions. And this is still going on. See, for example, this week’s news that Cameron is determined to protect the City of London from harmful European regulation.
basel iii October 19, 2011
Posted by Bradley in : financial regulation , add a commentIn contrast to the FSB’s peer reviews the Basel Committee’s review of implementation of Basel II and III published this week does contain some information about methodology. But the description illustrates that the focus on implementation is about formal implementation rather than implementation in substance:
In this report, the following classification is used to classify the status of adoption of regulatory rules:
1. Draft regulation not published: this status corresponds to cases where no draft law, regulation, or other official document has been made public to detail the planned content of the domestic regulatory rules. This status includes cases where a jurisdiction has communicated high-level information about its implementation plans but not detailed rules.
2. Draft regulation published: this status corresponds to cases where a draft law, regulation or other official document is already publicly available, for example for public consultation or legislative deliberations. The content of the document has to be specific enough to be implemented when adopted.
3. Final rule published: this status corresponds to cases where the domestic legal or regulatory framework has been finalised and approved but is still not applicable to banks.
4. Final rule in force: This status corresponds to cases where the domestic legal and regulatory framework is already applied to banks.
co-operative financial regulation ? August 30, 2011
Posted by Bradley in : financial regulation , add a commentThe Commission de Surveillance du Secteur Financier in Luxembourg has announced that it has declined to recognise ARM Asset Backed Securities S.A. as a regulated securitisation undertaking under the Luxembourg law on securitisation (the assets backing the securities are life insurance policies taken out by US seniors.) The UK’s FSA and the Central Bank of Ireland say they are working with the CSSF. The CSSF states:
The CSSF considers that this Decision, as from the notification thereof to ARM (which has occurred today), entails a suspension of any payment by ARM and prohibition for ARM, under penalty of voidance, to take any measures other than protective measures, unless otherwise authorized by the CSSF acting as supervisory commissioner (“commissaire de surveillanceâ€).
If unchallenged, the Decision will become final one month after its notification. Once the Decision is final, the district court dealing with commercial matters shall, as a consequence thereof, be requested to pronounce the dissolution and order the liquidation of ARM.
imf on uk June 7, 2011
Posted by Bradley in : financial regulation , add a commentFinancial stability in the UK is ..a global public good