Following yesterday’s breaking news by LeapRate that the US Commodity Futures Trading Commission (CFTC) had concluded its investigations into the activities of Lloyds Banking Group with regard to the manipulation of various benchmarks resulting in a $105 million penalty, the financial institution, one of the world’s largest, is now in hot water on its own side of the Atlantic.
Yesterday, the Financial Conduct Authority (FCA), Britain’s financial regulator, announced that it has issued a fine of £105 million to Lloyds Banking Group (in this case consisting of Lloyds Bank PLC, and Bank of Scotland PLC, referred to henceforth as Lloyds and BoS respectively.)
This particular penalty, which is substantial and now brings the total fiscal liability to $370 million payable to the CFTC and FCA, relates to serious misconduct relating to the Special Liquidity Scheme (SLS), the Repo Rate benchmark and the London Interbank Offered Rate (LIBOR).
£70 million of the fine relates to attempts to manipulate the fees payable to the Bank of England for the firms’ participation in the SLS, a taxpayer-backed government scheme designed to support the UK’s banks during the financial crisis. The £105 million total fine is the joint third highest ever imposed by the FCA or its predecessor, the Financial Services Authority, and the seventh penalty for LIBOR-related failures.
Whilst the firms’ LIBOR-related misconduct is similar in many ways to that of other financial institutions, the manipulation of the Repo Rate benchmark in order to reduce the firms’ SLS fees is misconduct of a type that has not been seen in previous LIBOR cases.
Tracey McDermott, the FCA’s director of enforcement and financial crime, made a statement yesterday to this effect: “The firms were a significant beneficiary of financial assistance from the Bank of England through the SLS. Colluding to benefit the firms at the expense, ultimately, of the UK taxpayer was unacceptable. This falls well short of the standards the FCA and the market is entitled to expect from regulated firms.”
“The abuse of the SLS is a novel feature of this case but the underlying conduct and the underlying failings – to identify, mitigate and monitor for obvious risks – are not new. If trust in financial services is to be restored then market participants need to ensure they are learning the lessons from, and avoiding the mistakes of, their peers. Our enforcement actions are an important source of information to help them do this.”
Repo Rate manipulation
Between April 2008 and September 2009, the firms manipulated their Repo Rate submissions in order to reduce the fees payable by them to the Bank of England for participation in the taxpayer-backed SLS. The Repo Rate, a now discontinued benchmark rate, was published daily by the BBA until December 2012. Repo Rate panel banks submitted the rates, across a range of maturities, at which they were prepared to trade in the repo market.
By artificially inflating their Repo Rate submissions, the firms sought to narrow the Repo Rate-LIBOR spread and thereby reduce the fees properly payable to the Bank of England for their participation in the SLS. A total of four individuals (a manager and a trader at each firm) colluded with each other in the manipulation of the firms’ Repo Rate submissions without any oversight or challenge.
This was an extremely serious failing, with the potential to reduce the fees due to the Bank of England from all the firms that participated in the SLS.
Lloyds Banking Group has paid the Bank of England £7.76 million in compensation for the reduction in the amount of Special Liquidity Scheme (SLS) fees received by the Bank (from all users of the SLS) as a result of manipulation by Lloyds and BoS of their submissions to the BBA GBP Repo Rate.
Failings related to LIBOR
LIBOR is based on daily estimates of the rates at which LIBOR panel banks borrow funds from one another. In relation to LIBOR, the firms’ misconduct between May 2006 and June 2009 included:
The firms making GBP, USD and JPY LIBOR submissions that took into account the profit and loss (P&L) of their money market trading books;
Lloyds colluding with Rabobank to seek to influence JPY LIBOR to benefit their respective trading positions;
The firms engaging in “forcing LIBOR” to influence the GBP LIBOR submissions of other LIBOR panel banks to benefit trading positions; and BoS manipulating its GBP and USD submissions as a result of at least two directives from a manager to avoid negative media comment and market perception in respect of its financial stability during the financial crisis.
This meant that the firms’ affected LIBOR submissions, and some of the LIBOR submissions made by other panel banks, did not fairly reflect the cost of inter-bank borrowing. This undermined the overall integrity of the LIBOR benchmark.
Sixteen individuals at the firms, seven of whom were managers, were directly involved in, or aware of, the various forms of LIBOR manipulation, including one manager who was also involved in the Repo Rate misconduct.
FCA principle breaches
The firms failed to identify, manage or control the relevant risks or meet proper standards of market conduct in relation to both the Repo Rate and LIBOR benchmarks. This breached two of the FCA’s fundamental principles for businesses, which underpin its objectives to ensure that markets function effectively, and to promote market integrity.
The firms agreed to settle at an early stage and therefore qualified for a 30% discount under the FCA’s settlement discount scheme. Without the discount the total fine would have been £150 million.
This was a significant cross-border investigation and, in particular, the FCA would like to thank the U.S. Commodity Futures Trading Commission (CFTC) and the U.S. Department of Justice (DoJ) for their cooperation in this investigation.