European investors reluctant to chase LIBOR compensation
widespread outrage among institutional investors over the fixing of the London
interbank offered rate (LIBOR), European buy-side firms appear reticent to go
toe-to-toe with the sell-side to seek compensation.
complexity of trying to determine the extent to which a buy-side firm was left
out of pocket across the instruments that rely on LIBOR following the rate
rigging, combined with the potential for compromising longstanding relationships
with brokers, have left the buy-side hesitant to act.
mechanics involved in analysing any possible compensation amounts is likely to
be too heavy,” said Paul Squires, head of trading at AXA Investment Managers.
“The Investment Management Association (IMA), as our association body, could
look into it, but in some ways
they are just as close to the banks as we are, so it is unclear whether there
is much appetite to launch a buy-side/sell-side battle. Our sense is that this
is more likely to be pursued by the clients themselves or the regulators,
rather than driven by asset managers."
Barclays is currently the only bank to have been fined by regulators for
rigging LIBOR, details of the involvement of other firms – thought to include
Citi, Deutsche Bank, Royal Bank of Canada, HSBC and J.P. Morgan – are poised to
emerge. Without knowing exactly how each of the banks that set LIBOR were
involved in the manipulation, figuring out the effect on individual portfolios
is considered near-impossible.
LIBOR rigging as “truly shocking” and “corrosive” to the financial system, Richard Saunders, CEO at the IMA, whose member firms
manage over £3.9 trillion in assets under management (AUM), suggested that
legal action should not be ruled out completely.
“It’s difficult to speculate
on litigation down the line but if there has been a loss to clients, buy-side
firms may need to seek recovery,” said Saunders. “I don't think the
relationship between buy- and sell-side would get in the way of this
necessarily, but trying to determine the practical impact of how manipulation
affected investors is a tough ask.”
No easy feat
The calculation of LIBOR is
based on the middle eight rates for overnight lending of funds, submitted daily
by 18 banks. This means it is currently unclear whether the rates submitted by
Barclays were even included in the final published figures.
Others have pointed out that it
is also unclear whether a firm could sue based on the fact that it was simply
trading in affected derivatives instruments during the time of the LIBOR
Even if this is determined,
the next challenge will be to apply the impact of the manipulation to the estimated
US$800 trillion worth of instruments relying on LIBOR.
liability-driven investment (LDI), for example, Andrew Connell, head of LDI at
Schroder Investment Management, noted that the performance of any LDI coverage asset is
primarily driven by changes in long-term interest rates.
this context we do not perceive that the apparent historic attempts to
manipulate LIBOR settings undermine the material funding risk benefits
available from liability coverage strategies,” he said.
strategies attempt to predict future liabilities and use derivatives to hedge a
fund’s exposure to measures such as interest rates or inflation.
than trying to recuperate potential losses, the buy-side seems more concerned
at the impact on the integrity of the financial system as a whole.
biggest disgust lies with the attitude and thinking of the people involved. How
are we going to restore investor confidence in financial markets with incidents
like this? The reputational damage is much worse than the monetary loss,” said
Peter de Proft, director general of the European Fund and Asset Management
Association, whose members represent €7.9 trillion in AUM. “We hope that
regulators and central banks will do their job in helping to recover losses.”
US steams ahead
The caution in Europe contrasts
with a more aggressive approach in the US, with reports Baltimore City Council
and a Connecticut-based pension fund are already pressing ahead with legal
Appearing before a Treasury select
committee on Monday, Paul Tucker, deputy governor of the Bank of England, said
the UK’s Financial Services Authority was focused on the damage to financial
stability that could arise as a result of US investors launching class action
lawsuits. Part of the concern is that those firms which lost out as a result of
rate rigging could seek compensation, whereas those which gained will not
expect to repay their gains, leading to an imbalance.
Collective lawsuits are not
governed by a common legal framework in Europe as they are in the US. The rules
for coordinating group litigation also differ across European states, with some
such as France, Italy, the Netherlands and Spain allowing associations to
represent multiple parties, while others such as Switzerland do not recognise
any form of class action.
A number of successful
lawsuits brought against custodians by pension funds that were systematically overcharged
for FX transactions may have also provided the incentive for US buy-side firms
to move forward. Such legal action has included the Massachusetts Pension Reserves Investment
Management alleging the Bank of New York Mellon had overcharged by US$20
million for FX transactions, as well as a separate lawsuit filed by the US
state of California against the same firm in 2009.