Contracts that referenced LIBOR set their payments from its value. People who handle such contracts and payments, and people who oversee submission controls and the running of the rate, can check here how the rate was set and where the misconduct entered.

What happened

On June 27, 2012, the UK Financial Services Authority (FSA) and the US Commodity Futures Trading Commission (CFTC) announced actions against Barclays. The reason was manipulation of the rate submissions used to calculate LIBOR and EURIBOR. EURIBOR is a comparable benchmark rate for the euro1. The FSA imposed a penalty of £59.5 million on Barclays Bank PLC2. The CFTC ordered Barclays PLC, Barclays Bank PLC, and Barclays Capital Inc. to pay a civil monetary penalty of USD 200 million3.

LIBOR was a benchmark rate used around the world to set the amounts paid on derivative trades, and it also affected payments on loans and other contracts. The FSA stated that confidence in benchmarks such as LIBOR is fundamental to UK and international financial markets, and it pointed to the risk that Barclays' conduct would damage that confidence4.

From 2009, the authorities had been investigating suspected misconduct involving LIBOR and other rates at several financial institutions5. After Barclays, UBS and RBS also settled with the authorities, and the UK government reviewed LIBOR.

How LIBOR was set at the time

LIBOR was a benchmark rate whose definition was set and administered by the British Bankers' Association (BBA). The definition asked each panel bank (a bank that submits rates) at what rate it could borrow funds in reasonable market size on the interbank market, shortly before 11:00 London time6. A submission was not an average of trades the bank had actually done. It was the bank's own judgment about the rate at which funds were available in the market6.

The calculation worked as follows7.

  1. Panel banks submitted a rate every day for each currency and tenor.
  2. A firm that compiled the submissions ranked them from highest to lowest, removed the ends, and averaged the rest. Until February 2011, the US dollar panel had 16 banks. The 4 highest and 4 lowest were removed, and the average of the remaining 8 was the published LIBOR.
  3. The published LIBOR and each bank's submission were published every day.
Panel banksSubmitCompilerAveragesTradesFix rateSubmissionsLIBOR
Figure 1From submission to publication of LIBOR (as of 2012)
Figure description

Panel banks submitted rates for each currency and tenor every day, the firm that compiled the submissions ranked them and averaged them after removing the ends, and the published LIBOR was used to fix the rate on trades that referenced it. The submissions at the request of traders, and the submissions lowered out of concern for reputation, that the FSA and the CFTC found for Barclays correspond to the stage in this flow where panel banks submitted their rates.

The FSA's final notice gives an example of how LIBOR was used. A bank that borrowed US dollars for 3 months might agree to pay a floating rate of 3-month US dollar LIBOR plus 0.20% (20bp)8. Under such an agreement, the rate was set from the LIBOR value for each interest period (rate fixing). If submissions moved LIBOR, the payments on trades like this moved too. The FSA stated that Barclays could, through its own submissions, have made a profit at the expense of other market participants9.

Consider a hypothetical example in which a floating-rate trade with a notional of USD 100 million exchanges interest every 3 months at 3-month US dollar LIBOR. Compare the case where LIBOR is 0.50% at the fixing for one interest period with the case where it is 0.52%. To keep the arithmetic simple, treat 3 months as a quarter of a year.

LIBOR Interest for 3 months Receiver of the floating rate Payer of the floating rate
0.50% USD 100 million × 0.50% × 1/4 = USD 125,000 Receives USD 125,000 Pays USD 125,000
0.52% USD 100 million × 0.52% × 1/4 = USD 130,000 Receives USD 130,000 Pays USD 130,000

When LIBOR is 0.02 percentage points higher, the receiver of the floating rate receives USD 5,000 more and the payer pays USD 5,000 more. When it is lower, the direction reverses. The same difference in the rate is a gain for one side and a loss for the other, so a submission that moves LIBOR can favor one party to a trade and disadvantage the other. However, LIBOR is an average that leaves out the submissions at both ends, so when a bank's submission is removed as one of the ends, its level does not enter the average.

Timeline

The LIBOR manipulation scandal unfolded in this order.

Date Event
June 27, 2012 The FSA imposed a penalty of £59.5 million on Barclays Bank PLC2, and the CFTC imposed a penalty of USD 200 million on three Barclays companies3
July 2, 2012 The UK Chancellor of the Exchequer commissioned Martin Wheatley (Managing Director of the FSA) to review how LIBOR was set and administered, and the sanctions available, including criminal ones10
September 28, 2012 The Wheatley Review published its final report10
October 17, 2012 The UK government accepted the review's recommendations in full10
December 19, 2012 The FSA imposed a penalty of £160 million on UBS11, and the CFTC imposed a penalty of USD 700 million12
February 6, 2013 The FSA imposed a penalty of £87.5 million on RBS13, and the CFTC imposed a penalty of USD 325 million14
February 2014 The administration of LIBOR passed from the BBA to ICE Benchmark Administration15

The penalties are in different currencies for different countries and agencies, so they are not added together.

What the authorities found: the conduct and its causes

For Barclays, the FSA's final notice and the CFTC's order make three findings.

The first is submissions made to profit on derivatives trades. The FSA found that, from January 2005 to July 2008, Barclays on many occasions took into account the requests of its interest rate derivatives traders when submitting US dollar LIBOR and EURIBOR16. Some requests came on behalf of traders at other banks. The CFTC's order likewise found that, from at least 2005 through 2009, swap traders asked for submissions to be changed to benefit their own trading positions, and that the submitters went along with the requests17. Both documents state that the LIBOR definition called for submissions based on borrowing funds in the interbank market and did not allow for taking derivatives positions into account18.

The second is submissions lowered out of concern for reputation. From around the start of the financial crisis, Barclays' submissions stayed higher than those of other banks. The FSA states that the media questioned whether Barclays had funding problems, and that senior management was concerned about this coverage19. It found that, from September 2007 to May 2009, submissions were repeatedly set with negative media comment in mind. The CFTC's order found that, over the same period, Barclays submitted US dollar LIBOR rates lower than the rates it actually had, under a directive from certain members of senior management20. As to where the instructions to lower submissions came from, the FSA says it is "unclear"19.

The third is weak controls. The FSA found that Barclays had no specific systems or controls for its LIBOR and EURIBOR submissions until December 200921. Concerns about LIBOR reached the compliance function of the investment bank three times in 2007 and 2008, and none was properly assessed or dealt with22. The CFTC's order also found that inadequate internal controls over the submission process and inadequate supervision of the trading desks made the misconduct possible23.

For UBS and RBS, too, the FSA made findings about the conduct. For UBS, it found that from January 2005 to December 2010 traders repeatedly asked submitters to adjust submissions. The same applies to the finding that they colluded with submitters at other panel banks to try to move the yen LIBOR submissions. At least 2,000 such requests were on record25. For RBS, the FSA's finding is that from October 2006 to November 2010 the positions of derivatives traders were taken into account in the yen and Swiss franc LIBOR submissions26.

In response to the scandal, the Wheatley Review concluded that the systems, controls, and governance arrangements for submitting to and administering LIBOR had proved inadequate, especially given the pressures that market developments in recent years had put on LIBOR24. It identified three weaknesses in how LIBOR was run. Governance relied too heavily on the submitting banks and a trade association, so it lacked independence. There was no system for oversight of the internal controls of submitting banks. And transparency and accountability were limited24.

What changed afterward

The Wheatley Review's final report of September 2012 concluded that LIBOR should be comprehensively reformed rather than replaced with another benchmark rate27. In the review's judgment, LIBOR was used in such a vast volume of transactions that replacing it would carry a high risk of financial instability and large-scale litigation27.

The report's ten-point reform plan included the following28.

  • Bring the setting and submission of LIBOR within statutory regulation.
  • Have the BBA transfer the administration of LIBOR to a new administrator chosen by tender.
  • Base submissions on actual transaction data, and phase out publication for the currencies and tenors that lack enough underlying transactions.
  • Publish each bank's submission after three months.

The change of administrator took place in February 2014. ICE Benchmark Administration, chosen through a tender, took over the administration of LIBOR from the BBA15.

On the effects of the scandal, a Bank of Japan and Financial Services Agency report notes that in "summer 2012" the manipulation of submissions by some overseas panel banks came to light and badly shook confidence in LIBOR. Efforts to restore confidence followed, based on the view that benchmark rates should rest on actual transactions as far as possible29. The announcement that LIBOR publication would end can be checked in the timeline.

The mechanisms for moving trades to successor rates are covered in The Transition from LIBOR.

What this page does not cover

The outcomes of criminal trials of individuals are not covered on this page.

Notes

  1. FSA, "Final Notice" (Barclays Bank Plc, June 27, 2012; hereafter "FSA final notice (Barclays)"), paragraphs 3 and 31. EURIBOR is defined as the rate at which a prime bank in the euro zone offers deposits to another bank. ↩

  2. FSA final notice (Barclays), paragraphs 1 and 2 (page 1). The penalty is £59.5 million, and Barclays received a 30% discount for settling early (without it, £85 million). ↩ ↩2

  3. CFTC order (Docket No. 12-25, June 27, 2012; hereafter "CFTC order"), page 30. The civil monetary penalty is USD 200 million, and the order covers three companies (page 1). ↩ ↩2

  4. FSA final notice (Barclays), paragraph 6 (page 2) and paragraph 19 (page 4). ↩

  5. HM Treasury, "The Wheatley Review of LIBOR: final report" (September 2012; hereafter "Wheatley final report"), paragraph 1.2 (printed page 5, PDF page 9). From 2009, the FSA investigated together with authorities in several countries and regions. ↩

  6. FSA final notice (Barclays), paragraphs 30 and 31 (pages 5–6). The BBA's definition dates from 1998, and a submission is a subjective judgment of the rate at which funds are available in the interbank market, not an average of the rates a bank has traded at. ↩ ↩2

  7. FSA final notice (Barclays), paragraphs 34–37 (pages 6–7). Thomson Reuters compiled the submissions and calculated LIBOR on behalf of the BBA, and each bank's submission was published every day. ↩

  8. FSA final notice (Barclays), paragraph 5 (page 2) and paragraph 29 (page 5). Paragraph 5 also states that LIBOR was used to determine payments on derivatives, and that it also affected payments on loans and mortgages. ↩

  9. FSA final notice (Barclays), paragraph 11 (page 3). ↩

  10. Financial Conduct Authority (FCA), announcement of the penalty on UBS (published December 19, 2012; hereafter "FCA UBS announcement"), Notes for editors. They state the commissioning (July 2), the final report (September 28), and the government's acceptance in full (October 17). ↩ ↩2 ↩3

  11. FCA UBS announcement, opening paragraph. The penalty is £160 million. ↩

  12. CFTC, Release Number 6472-12 (December 19, 2012). It reports the order imposing a civil monetary penalty of USD 700 million on UBS AG and UBS Securities Japan Co., Ltd. ↩

  13. FSA, "Final Notice" (The Royal Bank of Scotland plc, February 6, 2013; hereafter "FSA final notice (RBS)"), paragraphs 1 and 2 (page 1). The penalty is £87.5 million, and RBS received a 30% discount (without it, £125 million). ↩

  14. CFTC, Release Number 6510-13 (February 6, 2013). It reports the order imposing a civil monetary penalty of USD 325 million on The Royal Bank of Scotland plc and RBS Securities Japan Limited. ↩

  15. HM Treasury, "First day of business for new LIBOR administrator" (February 2014). The tender committee made its recommendation on July 9, 2013, and the transfer is described as implementing a recommendation of the Wheatley Review. ↩ ↩2

  16. FSA final notice (Barclays), paragraph 8 (page 2). The period is January 2005 to July 2008. ↩

  17. CFTC order, pages 2–3 (conduct from at least 2005 through at least 2009). The requests by swap traders and the submitters' responses are on page 3. ↩

  18. FSA final notice (Barclays), paragraph 9 (page 2). CFTC order, page 4. ↩

  19. FSA final notice (Barclays), paragraphs 12–14 (page 3). The period is September 2007 to May 2009, and paragraph 14 states that the origin of the instructions to lower submissions is unclear. ↩ ↩2

  20. CFTC order, pages 3–4. The period is late August 2007 to early 2009, and the order attributes the conduct to a directive by certain members of senior management. ↩

  21. FSA final notice (Barclays), paragraph 15 (page 3). From January 2005 to June 2010, Barclays lacked adequate risk management systems and controls, and systems specific to LIBOR and EURIBOR submissions were not in place until December 2009. ↩

  22. FSA final notice (Barclays), paragraphs 17 and 18 (pages 3–4). ↩

  23. CFTC order, page 3. The order states that the lack of specific controls and the inadequate supervision of trading desks allowed the conduct to occur. ↩

  24. Wheatley final report, paragraphs 2.1 and 3.1. Paragraph 2.1 finds the systems, controls, and governance inadequate, and paragraph 3.1 gives three weaknesses: lack of independence in governance, lack of oversight of the internal controls of submitting banks, and limited transparency and accountability. ↩ ↩2 ↩3

  25. FCA UBS announcement. The findings cover January 1, 2005 to December 31, 2010 and cite requests by traders, collusion with other banks and brokers, and instructions to submit rates to protect reputation. At least 2,000 improper requests were recorded. ↩

  26. FSA final notice (RBS), paragraphs 5 and 6 (pages 1–2). The breach of Principle 5 ran from October 2006 to November 2010 and concerned the yen and Swiss franc LIBOR submissions. ↩

  27. Wheatley final report, paragraphs 1.11 and 1.12 (printed page 7, PDF page 11). ↩ ↩2

  28. Wheatley final report, Box 1.B "A ten-point plan for comprehensive reform of LIBOR" (printed pages 8–9, PDF pages 12–13), items 1, 2, 6 and 7. ↩

  29. Bank of Japan Financial Markets Department and Financial System and Bank Examination Department, and Financial Services Agency Strategy Development and Management Bureau and Supervisory Bureau, "円LIBOR 移行対応の振り返りと今後の取り組み" (Looking back on the yen LIBOR transition and future initiatives; BOJ Review 2022-J-8, May 2022), end of page 1 to the start of page 2, "LIBOR 公表停止の経緯" (in Japanese). "Summer 2012" is the report's own wording. ↩