A recent class action lawsuit was filed last month by the small Alaska Electrical Pension fund against several major banks, including Bank of America Corp. The banks were accused of conspiring to fix a leading benchmark for interest-rate derivatives. An investigation by the U.S. Commodity Futures Trading Commission (CFTC) into possible abuses is currently ongoing. The banks are accused of manipulating the ISDAfix rate, which determines valuations for complex derivative products.
Does this sound familiar? If you’ve followed the London Interbank Offered Rate (LIBOR) rigging scandal, which we have written on recently, it should. The new suit, which echoes the LIBOR scandal, also names as defendants Barclays Bank PLC, Citigroup Inc., Credit Suisse AG, Deutsche Bank AG, Goldman Sachs & Co., HSBC Bank PLC, JPMorgan Chase & Co., Nomura Securities International Inc., Royal Bank of Scotland PLC, UBS AG, BNP Paribas SA, and Wells Fargo NA, as well as interdealer broker ICAP PLC.
The banks worked closely with ICAP, which until January was tasked by the International Swaps and Derivatives Association (ISDA) with managing the daily setting of the U.S. dollar-rate version of ISDAfix. ISDA removed ICAP as the rate-setter in January, after the CFTC began investigating possible manipulation of the rate. The CFTC, the United Kingdom’s Financial Conduct Authority, and Germany’s BaFin are all investigating the same or similar allegations, but no charges have yet been filed.
The ISDAfix benchmark – a daily measure of the fixed rate for interest rate swaps that affects the price of trillions of dollars of derivatives – is a reference rate that, like Libor, relies on submissions from panel banks. ISDAfix is also used to set interest rates for commercial real estate, making it the CRE analog of Libor. ICAP used to set the ISDAfix dollar rates by taking an average reference rate and then having the banks either validate the rate or submit their own rate. The banks were responsible for submitting rate quotes, which ICAP essentially compiled.
The suit, which includes allegations of antitrust violations, claims that the parties worked together to set the rate at the point where it was most profitable for them. According to the suit, ICAP calculated the rate during the time period at issue in the suit taking into account the average trading rate of interest rate swaps at 11 o’clock every morning. The banks involved in the ISDAfix-setting process are alleged to have conspired with each other and ICAP to manipulate the trading rate through (among other things) engaging in high-volume, coordinated buying or selling just before ICAP’s daily 11 a.m. assessment (“banging the close,” according to the complaint).
ISDA fix rate quote submissions go to five decimal points, a thousandth of a basis point. As the complaint points out, “The odds against contributors unilaterally submitting over an extended period the exact same quotes down to the thousandth of a basis point, without colluding, are astronomical. Yet this happened almost every single day between (at least) 2009 and December 2012. Just as conspicuously, this obvious coordination only stopped when the defendant banks learned that their benchmark-setting efforts were under investigation. Defendants’ manipulation of ISDAfix — even if sometimes only by a few basis points — impacted trillions of dollars of financial instruments.” The Plaintiff’s analysis also found a 70 percent reduction in the practice of “banging the close” after December 2012.
Judge Naomi Reice Buckwald in a hearing let the parties know that she needed more information before she could approve the settlement. She indicated that some of the claimants’ claims may well be time-barred. In a prior order, the judge had ruled that some claims had been filed too late and were barred. She pointed out that money paid to folks who have no claims, it would “come out of the pockets of those who do have claims.” Once this issue is cleared up Judge Buckwald is expected to approve the settlement.
Sources: Law360.com and Reuters
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