Buy-side may never recover LIBOR losses
widespread outrage sweeping the financial industry after revelations Barclays
was involved in fixing key lending benchmarks, institutional investors seeking
to recoup losses face an almighty challenge.
US and UK
regulators have fined Barclays more than US$450 million for manipulating the rates
banks borrow unsecured interbank funds – the London interbank offered rate (LIBOR) and the euro
interbank offered rate (EURIBOR) between 2005 and 2007.
Traders on the
derivatives desks at Barclays were found to be colluding with those responsible
for submitting the bank’s EURIBOR and LIBOR positions to benefit their own trades.
Other LIBOR-setting banks are also under investigation for similar offences.
benchmarks form the reference rate used for a multitude of derivatives –including
the US$504 trillion interest rate swap market, forward rate agreements and
inflation swaps – buy-side firms could find the rate they paid on some
contracts was inaccurate.
Mountain to climb
Money managers could
claim compensation for a breach of the ISDA Master Agreement, the framework
governing OTC derivatives contracts developed by the International Swaps and
Derivatives Association (ISDA). The ISDA agreement lets firms seek the early
termination of deals if positions were distorted, such as through the
manipulation of LIBOR.
But a mammoth
task faces institutional investors if they are to be successful in any class
action or group litigation proceedings.
the extent that any bank may have profited from manipulation, it will by
definition have been at the expense of other participants in the
market. But identifying who – and by how much – is at this stage extremely
difficult,” read a statement from UK buy-side trade body the Investment
ability to claim compensation will largely depend on the sophistication of the
firm involved, explained Steve Wood, founder of Global Buy-Side Trading
Consultants, and former global head of trading at Schroder Investment
transactions that have a LIBOR element to them usually have an added mark-up,”
Wood explained. “If the total is not expressed as a consolidated rate, it will
be impossible for the buy-side to determine whether they were disadvantaged
when entering into some structured product trades with their brokers.”
added that while ISDA Master Agreements form the basis of many transactions,
they are frequently modified, particularly by smaller buy-side firms that use
‘free-form’ agreements for each swap they enter into. By comparison, larger buy-side
firms typically have a global agreement that covers transactions for each
subsidiary of a counterparty it deals with.
in the Q2 issue of The TRADE, Terence Nahar, investment director in the
financial solutions group of Scottish Widows Investment Partnership, noted that
the market is moving to more standardised terms, citing the recently released
draft credit support annex framework. “This is the latest sign the market is
moving towards more standardised collateralisation agreements for non-centrally
cleared derivatives,” he said.
Burden of proof
Barclays is not
expected to be the only major bank involved in attempts to manipulate lending
rate benchmarks, with the UK Financial Services Authority’s director of
enforcement Tracey McDermott, stating that the agency “continues to pursue a number of other significant
cross-border investigations in this area”.
This will make trying to prove
to what extent the LIBOR/EURIBOR benchmarks disadvantaged derivatives exposures
held by the buy-side a data intensive task. Indeed many money mangers may find
that after analysing the data, they actually profited from the banks’
There is also the danger of
souring longstanding relationships between institutional investors and brokers.
This may not be in the buy-side’s interest, particularly during a time of
regulatory upheaval during which it will rely on brokers to comply with
sweeping changes to derivatives markets.
Furthermore, with at least the
top 20 law firms already representing investment banks, buy-side firms may have
to seek specialist representation to avoid conflicts of interest.
But the furore surrounding the
incident could be the last straw for some investors.
“We have yet another episode
that demonstrates the disconnect between what most of us think is reasonable
and decent behaviour and that which has taken place at the banks,” commented
Stephen Peak, director of pan-European equities at Henderson Global Investors. “Class actions are in theory
considerable given that the LIBOR market is many hundreds of trillions.
However, our guess at this stage is that it will prove challenging for
claimants to be meaningfully successful.”
A research report from Brad
Hintz, senior analyst at Sanford Bernstein, noted that class action litigation
in the US is already beginning to take shape.
“As the regulatory cases against other banks
become public Bernstein would expect the claims against Barclays and
potentially other banks to grow significantly as the size of the alleged
manipulation becomes public and the number of aggrieved parties grow. Class
action civil claims typically are settled four or more years after they are
filed,” read the report.