UBS Stung with Record Fine for Libor Manipulation

The FSA's indictment, distributed earlier this morning, accuses UBS of systematically manipulating the benchmark rates over a period of five years and colluding with other market participants in order to do so, benefiting its own trading results. The regulator said that it found 2,000 cases of documented requests for rate fixing, and also revealed that an "unquantifiable" number of oral requests were also made.

Libor and Euribor are benchmark rates that essentially determine how banks lend to one another, and are calculated by Thomson Reuters on a daily basis, overseen by the British Bankers' Association in London, after submission from panel institutions. As well as setting loan conditions between banks, many retail financial products, such as mortgages and loans, derive their interest rate from a fixed amount plus Libor.

Given the widespread nature of the case, the FSA said that every submission made for Libor and Euribor by UBS during this period is suspect. Although UBS split its trading and submitting roles in 2009, its systems and compliance function were unable to detect requests for manipulation, which used codewords. The FSA said that up to 45 individuals, including traders and senior managers, had direct knowledge of the activity.

A damning section of the release also stated that, in order to encourage interdealer brokers to help affect other panel banks' submissions for Japanese Yen (JPY), corrupt brokerage payments were made through so-called wash trades. These trades are essentially risk-free and contain little commercial benefit, serving instead to transfer money through brokerage commission payments.

Although UBS did not qualify for the full 30 percent discount for settlement, it did gain a 20 percent mark down, which otherwise would have raised the fine to £200 million (approximately $388 million). It is the largest financial penalty ever levied by the UK regulator, which is being split into two component parts in 2013.

Although UBS did not qualify for the full 30 percent discount for settlement, it did gain a 20 percent mark down, which otherwise would have raised the fine to £200 million

"The findings we have set out in our notice today do not make for pretty reading," says Tracy McDermott, director of enforcement and financial crime at the FSA. "The integrity of benchmarks such as Libor and Euribor are of fundamental importance to both UK and international financial markets. UBS traders and managers ignored this. They manipulated UBS's submissions in order to benefit their own positions and to protect UBS's reputation, showing a total disregard for the millions of market participants around the world who were also affected by Libor and Euribor. UBS's misconduct was all the more serious because of the orchestrated attempts to manipulate the JPY Libor submissions of other banks, as well as its own, and the collusion with interdealer brokers and other panel banks in coordinated efforts to manipulate the fix.

"Over an extended period UBS allowed this to happen through its failure to control its business appropriately to ensure that Libor and Euribor submissions properly reflected the relevant requirements. There should be no doubt about how seriously the FSA views these failings. This is our largest penalty to date and demonstrates our commitment to ensuring that those in the wholesale markets do not put their own interests above those of the markets as a whole," McDermott continued

The FSA settlement was part of a wider fine regime with other regulators, which has so far totalled around £940 million (approximately $1.8 billion) in fines for UBS. This figure comes despite immunity from some regulators for cooperation in the early stages of the investigation. More banks are expected to be fined over Libor and Euribor in the coming days.