Risk & Compliance

Barclays Hit with Massive Fines for Rigging Derivatives

The offenses have also cost chief executive Bob Diamond, CFO Chris Lucas, and other executive directors their annual bonuses — but not their jobs.
Andrew SawersJune 27, 2012

Barclays has been fined £290 million ($451 million) by U.K. and U.S. regulators after admitting rigging the market in interest-rate derivatives by providing false information to market authorities. Barclays’s actions distorted the calculation of Libor and Euribor benchmark rates, helping the bank’s traders with their positions.

Barclays settled with the U.S. Commodity Futures Trading Commission and the U.S. Department of Justice Fraud Section for fines of $200 million and $160 million, respectively, according to Reuters. The U.K. Financial Services Authority (FSA) hit the bank for £59.5 million ($93 million), the largest fine the regulator has ever slapped on an offending institution.

The offenses have also cost chief executive Bob Diamond, CFO Chris Lucas, and other directors their annual bonuses, but not their jobs. Other banks could also be implicated, since authorities say their investigations are continuing.

The bank had submitted false interest-rate data to the British Bankers Assn. (BBA) and the European Banking Federation (EBF), which uses that information to calculate London Interbank Offered Rate (Libor) and the Euro Interbank Offered Rate (Euribor).

Libor and Euribor are reference rates that indicate the interest being charged when banks lend to each other. The BBA and the EBF collect information submitted by banks such as Barclays. The rates play a very important role in money markets and in a wide range of over-the-counter (OTC) and exchange-traded derivatives contracts.

The notional amount outstanding of OTC interest-rate derivatives contracts in the first half of 2011 has been estimated at $554 trillion. The total value of short-term interest-rate contracts traded on the LIFFE financial futures market in London in 2011 was €477 trillion, including more than €241 trillion relating to the three month Euribor futures contract (the fourth-largest interest-rate futures contract by volume in the world).

The FSA said Barclays’s breaches involved “a significant number of employees” and occurred over a number of years. The extent to which Barclays benefited from feeding false information into the market is not yet known.

The FSA said the bank’s misconduct included:

  • Making submissions to the BBA and EBF that took into account requests from Barclays’s interest-rate derivatives traders. These traders were motivated by profit and sought to benefit Barclays’s trading positions;
  • Seeking to influence the Euribor submissions of other banks contributing to the rate-setting process; and
  • Reducing its Libor submissions during the financial crisis as a result of senior management’s concerns over negative media comment.

Further, the FSA said, Barclays failed to have adequate systems and controls in place relating to its Libor and Euribor submissions until June 2010.

Tracey McDermott, the FSA’s acting director of enforcement and financial crime, said in a statement that “Barclays’ misconduct was serious, widespread and extended over a number of years. The integrity of benchmark reference rates such as Libor and Euribor is of fundamental importance to both UK and international financial markets.”

McDermott said the bank’s actions were “possible because Barclays failed to ensure it had proper controls in place. Barclays’ behaviour threatened the integrity of the rates with the risk of serious harm to other market participants.”

More banks could be in the picture. The FSA stated that it is continuing to pursue “a number of other significant cross-border investigations in this area and the action we have taken against Barclays should leave firms in no doubt about the serious consequences of this type of failure.”

Barclays chief executive Diamond admitted the bank’s actions in a statement. “The events which gave rise to today’s resolutions relate to past actions which fell well short of the standards to which Barclays aspires in the conduct of its business. When we identified those issues, we took prompt action to fix them and co-operated extensively and proactively with the Authorities,” he said.

“To reflect our collective responsibility as leaders, Chris Lucas, [chief operating officer] Jerry del Missier, [investment bank head] Rich Ricci, and I have voluntarily agreed with the Board to forgo any consideration for an annual bonus this year,” Diamond added.

Andrew Sawers is editor of CFO European Briefing, a CFO online publication.