BRUSSELS IS wading into the interest rate-rigging scandal rocking the City of London with a proposal to make attempts to manipulate market indices across the EU illegal and for a fundamental review of rules on how the London inter-bank lending rate – Libor – is set.
Michel Barnier, the EU commissioner overseeing financial services, will amend reforms to EU market abuse rules so that potential “loopholes” are closed and criminal sanctions specifically cover tampering with indices such as Libor and Euribor.
Mr Barnier called the falsification of such benchmark rates a “betrayal” with potentially “systemic consequences”.
Speaking in France yesterday, he said: “Anyone thinking of manipulating markets needs to know they’ll face sanctions, including possibly criminal ones.”
His intervention comes amid signs of a backlash in Washington over an affair that has already forced the resignation of Barclays’ chief executive Bob Diamond.
US congressman Barney Frank, who drove through an eponymous financial regulation overhaul, told the Financial Times that banks “monkeying” with Libor for their own benefit was “outrageous”.
While the US already makes it illegal to put false prices into the markets, the Democratic congressman called for hearings in the House and Senate that should “call the whole structure of Libor into account”.
His criticism echoes that of the Bundesbank, Germany’s central bank, which is pushing for reforms to a system that is “too easy” to manipulate. “It is vulnerable to fraud,” said Andreas Dombret, a Bundesbank board member.
This issue will be taken up at EU level by Mr Barnier, whose staff will be reviewing market indices to see whether they should be overseen by regulators.
“I have never believed in self-regulation for a public good,” Mr Barnier told the FT.
While this review could take months, Mr Barnier will bring forward changes to his market abuse directive and regulation. These reforms, first published last year, only indirectly covered manipulation of market indices.
Mr Barnier’s work will overlap with a UK probe, led by Martin Wheatley, a top regulator, which examines the regulatory regime for Libor and a host of other indices that are set by unregulated or semi-regulated bodies.
While the Brussels initiative is likely to complement Mr Wheatley’s conclusions on whether to apply criminal penalties to manipulating indices, there is potential for a clash with London on whether to regulate some or all of the indices.
Both reviews will consider to what extent Libor and other indices – which are used to price everything from certain commodities to interest rates – should be based on actual transactions against estimates from participating institutions.
The move comes as Barclays was sued by an investor who claimed her futures-trading business was harmed by the bank’s admitted manipulation of Libor.
A copy of the complaint, which also names JP Morgan Chase and Citigroup among other defendants, was provided by Hagens Berman Sobol Shapiro, the law firm representing the investor.
“Based on what we’ve seen so far, the rate-fixing scheme was apparently an open secret within Barclays, leaving a broad trail of evidence of the banks’ complicity,” Steve Berman, a lawyer for the investor, said in a statement.
The investor, Karen Kalaway, was the principal of Riff-Raff Trading in the Chicago suburb of Inverness, Illinois.
Her lawsuit seeks to represent all US-based investors who bought or sold Euribor-related financial instruments between January 1st, 2005, and December 31st, 2009.
Barclays, Britain’s second-largest bank by assets, was fined £290 million (€365 million) on June 27th for rigging the Libor, a global benchmark, for profit.
