“Global regulators have exposed flaws in banks’ internal controls that may have allowed traders to manipulate interest rates around the world, two people with knowledge of the probe said.
Investigators also have received e-mail evidence of potential collusion between firms setting the London interbank offered rate, said the people, who declined to be identified because they weren’t authorized to speak publicly. Regulators are focusing on a lack of so-called Chinese walls between traders and employees making interest-rate submissions on behalf of their banks, the people said. In some cases, the two groups may have sat close to each other, one person said.
Britain’s Financial Services Authority is probing whether banks’ proprietary-trading desks exploited information they had about the direction of Libor to trade interest-rate derivatives, potentially defrauding their firms’ counterparties, the people said. The investigation may lead to civil fines for the banks and criminal charges for the traders involved, the people said. No penalties are likely from the FSA before year-end, and the case hasn’t moved toward criminal charges, one person said.
“The entire story is very embarrassing for the banks,” said Tom Kirchmaier, a fellow in the financial-markets group at the London School of Economics. “I don’t know how they will eradicate this. The regulators have to rethink the way they set Libor.”
The rate, a benchmark for about $360 trillion of financial products worldwide, is derived from a survey of banks conducted daily on behalf of the British Bankers’ Association in London.
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