SEC COMMISSIONER KARA STEIN'S DISSENTING STATEMENT REGARDING DEUTSCHE BANK'S WAIVER FROM INELIGIBLE ISSUER STATUS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION
PUBLIC STATEMENT

Dissenting Statement in the Matter of Deutsche Bank AG, Regarding WKSI

Commissioner Kara M. Stein
May 4, 2015

I respectfully dissent from the Commission’s Order (“Order”), approved on May 1, 2015, by a majority of the Commission.[1] The Order grants Deutsche Bank AG a waiver from ineligible issuer status triggered by a criminal conviction of its subsidiary, DB Group Services (UK) Ltd. (collectively with Deutsche Bank AG, “Deutsche Bank”), for manipulating the London Interbank Offered Rate (“LIBOR”), a global financial benchmark.[2] This waiver will allow Deutsche Bank to maintain its well-known seasoned issuer (“WKSI”) status, which would have been automatically revoked as a result of its criminal misconduct absent a Commission waiver.

Created by the Commission as part of the Securities Offering Reforms of 2005, WKSI status is available “for the most widely followed issuers representing the most significant amount of capital raised and traded in the United States.”[3] This status confers on the largest companies certain advantages over smaller companies. WKSIs are granted nearly instant access to investors through the capital markets. WKSIs enjoy greater flexibility in their public communications and a streamlined registration process with less oversight than smaller businesses. For example, unlike smaller businesses, the WKSI issuer does not have to wait for the Division of Corporation Finance to review and declare a registration statement effective prior to selling financial products to investors.[4] WKSI companies also enjoy a number of other privileges related to the payment of fees.

With these WKSI advantages comes a modicum of responsibility. WKSIs must meet the very low hurdle of not being ineligible. This means that, among other things, they have not been convicted of certain felonies or misdemeanors within the past three years.[5] In granting this waiver, the Commission continues to erode even this lowest of hurdles for large companies, while small and mid-sized businesses appear to face different treatment.[6]

Deutsche Bank’s illegal conduct involved nearly a decade of lying, cheating, and stealing. This criminal conduct was pervasive and widespread, involving dozens of employees from Deutsche Bank offices including New York, Frankfurt, Tokyo, and London. Deutsche Bank’s traders engaged in a brazen scheme to defraud Deutsche Bank’s counterparties and the worldwide financial marketplace by secretly manipulating LIBOR.[7] The conduct is appalling. It was a complete criminal fraud upon the worldwide marketplace.

Prior Commissions sensibly did not grant WKSI waivers for criminal misconduct. At least, that was the practice until September 19, 2013, when Commission staff granted a waiver to a large institution that pleaded guilty to criminal fraud.[8] This Commission granted another waiver on April 25, 2014, to another large institution that had also been criminally convicted of manipulating LIBOR.[9] A majority of this Commission, with this current action, continues the trend by granting its third waiver for criminal conduct at a large institution in a little less than two years. It is safe to assume that these waiver requests will continue to roll in, as issuers are now emboldened by an unofficial Commission policy to overlook widespread and serious criminal conduct — and ensure that the largest companies retain their array of advantages in our capital markets.

It is unclear to me how this waiver can be granted, for reasons substantially similar to those I outlined in my dissent regarding another institution involved in LIBOR manipulation.[10] Among other factors, the egregious criminal nature of the conduct and the duration of the manipulation (almost a decade) weigh heavily in my mind when considering this waiver. Additionally, Deutsche Bank is a recidivist, and its past conduct undermines its current promise of future good conduct. Since 2004, Deutsche Bank has, among other violations, a criminal admission of wrongdoing connected to promoting tax shelters,[11] a settlement involving misleading investors about auction rate securities,[12] and a violation against its investment bank for improperly asserting influence over research analysts.[13] Deutsche Bank requested and was previously granted a WKSI waiver in 2007 and 2009.

This criminal scheme involving LIBOR manipulation was designed to inflate profits, and it was effective. It created the impression that Deutsche Bank was more creditworthy and profitable than it actually was. Accordingly, the conduct affected its financial results and disclosures. Because LIBOR plays such an important role in the worldwide economy, manipulation of it goes to the heart of many aspects of Deutsche Bank’s disclosures. Interest rates represented to clients and the public also were clearly false. Based on this conduct, I do not find any basis to support the assertion that Deutsche Bank’s culture of compliance is dependable, or that its future disclosures will be accurate and reliable.

Finally, Deutsche Bank has not shown good cause for receiving a waiver from automatic disqualification, in this, its third WKSI waiver request in eight years. I am unable to conclude that Deutsche Bank’s culture of compliance and the reliability and accuracy of its future disclosures establishes good cause for a waiver. As the U.S. Commodity Futures Trading Commission’s (“CFTC”) Director of Enforcement noted: “Deutsche Bank’s culture allowed such egregious and pervasive misconduct to thrive.”[14]

For all of these reasons, I cannot support the Commission’s latest waiver.

In addition, the Commission adopted rules disqualifying felons and other “Bad Actors” from Rule 506[15] offerings on July 10, 2013.[16] Based on the criminal conduct in this case, I expected to receive a request from Deutsche Bank AG for a waiver from the automatic disqualification contained in Rule 506.[17] After all, the final CFTC order was “based on a violation of any law that prohibits fraudulent, manipulative, or deceptive conduct.”[18] It should therefore trigger an automatic disqualification absent a waiver.

However, based on a loophole contained in Rule 506(d)(2)(iii), the CFTC has intervened and prevented the bad actor disqualification question from even coming before the Securities and Exchange Commission. The CFTC saw fit to opine on the SEC’s Rule 506 jurisprudence about whether Deutsche Bank AG should receive a waiver from automatic disqualification under SEC rules. It is unclear to me what, if any, analysis went into this decision and what prompted the CFTC to insert language into its final order stating that a bad actor disqualification “should not arise as a consequence of this Order.”[19] The implications of the CFTC’s actions here — and in other actions[20] — are deeply troubling. The Commission should closely review this provision and how it is being used.


[1] In the Matter of Deutsche Bank AG, Order under Rule 405 of the Securities Act of 1933, Granting a Waiver from Being an Ineligible Issuer, available at http://www.sec.gov/rules/other/2015/33-9764.pdf.

[2] For more information on the statements of facts, plea agreement, and deferred prosecution agreement related to the LIBOR manipulation, see “Deutsche Bank's London Subsidiary Agrees to Plead Guilty in Connection with Long-Running Manipulation of LIBOR,” available at http://www.justice.gov/opa/pr/deutsche-banks-london-subsidiary-agrees-plead-guilty-connection-long-running-manipulation.

[3] See Division of Corporation Finance’s Revised Statement on Well-Known Seasoned Issuer Waivers (Apr. 24, 2014), available at http://www.sec.gov/divisions/corpfin/guidance/wksi-waivers-interp-031214.htm.

[4] Id.

[5] See Rule 405 of the Securities Act of 1933 (the “Securities Act”) (17 C.F.R. 230.405).

[6] A review of WKSI waivers granted since August 2013, reveals a total of 12 such waivers granted, 100% of which went to large financial institutions. See Division of Corporation Finance, available at http://www.sec.gov/divisions/corpfin/cf-noaction.shtml#405. This is precisely the concern I expressed a year ago in a dissenting statement from another waiver. See Dissenting Statement In the Matter of Royal Bank of Scotland Group, plc, Regarding Order Under Rule 405 of the Securities Act of 1933, Granter a Waiver from Being an Ineligible Issuer (Apr. 28, 2014), available at http://www.sec.gov/News/PublicStmt/Detail/PublicStmt/1370541670244 (“I fear that the Commission’s action to waive our own automatic disqualification provisions arising from RBS’s criminal misconduct may have enshrined a new policy—that some firms are just too big to bar.”).

[7] See Deutsche Bank Services (UK) Ltd. Statement of Facts, available at http://www.justice.gov/sites/default/files/opa/press-releases/attachments/2015/04/23/dbgs_statement_of_facts.pdf. Numerous Deutsche Bank derivatives traders communicated their desire to manipulate LIBOR to Deutsche Bank pool and money market derivatives traders, causing the pool and money market derivatives traders to submit false and misleading LIBOR contributions. These derivatives traders would then enter into derivatives transactions tied to LIBOR with unsuspecting counterparties who were unaware of Deutsche Bank’s criminal manipulation of LIBOR going on behind the scenes. These counterparties included universities, charitable organizations, and other financial institutions.

[8] See Letter from the Division of Corporation Finance to Mr. Steven Slutzky (Sep. 19, 2013) available at http://www.sec.gov/divisions/corpfin/cf-noaction/2013/ubs-ag-091913-405.pdf regarding “UBS-AG — Waiver Request of Ineligible Issuer Status under Rule 405 of the Securities Act.”

[9] See Order Under Rule 405 of the Securities Act of 1933, Granting a Waiver From Being an Ineligible Issuer, In the Matter of Royal Bank of Scotland Group, plc, Rel. No. 33-9578, (Apr. 25, 2014) available at http://www.sec.gov/rules/other/2014/33-9578.pdf.

[10]See Dissenting Statement In the Matter of Royal Bank of Scotland Group, plc, Regarding Order Under Rule 405 of the Securities Act of 1933, Granter a Waiver from Being an Ineligible Issuer (Apr. 28, 2014), available at http://www.sec.gov/News/PublicStmt/Detail/PublicStmt/1370541670244.

[11] See “Deutsche Bank to Pay More Than $550 Million to Resolve Federal Tax Shelter Fraud Investigation,” available at http://www.justice.gov/sites/default/files/tax/legacy/2011/01/03/deutschebankpr.pdf.

[12] See “SEC Finalizes ARS Settlements With Bank of America, RBC and Deutsche Bank, Providing Over $6 Billion in Liquidity to Investors,” available at https://www.sec.gov/litigation/litreleases/2009/lr21066.htm.

[13] See “SEC Sues Deutsche Bank Securities Inc. for Research Analyst Conflicts of Interest and Failure to Timely Produce All E-Mail,” available at https://www.sec.gov/litigation/litreleases/lr18854.htm.

[14] U.S. Commodity Futures Trading Commission, Press Release “Deutsche Bank to Pay $800 Million Penalty to Settle CFTC Charges of Manipulation, Attempted Manipulation, and False Reporting of LIBOR and Euribor,” (Apr. 23, 2015), available at http://www.cftc.gov/PressRoom/PressReleases/pr7159-15.

[15] Rule 506 of Regulation D is considered a safe harbor for the private offering exemption of Section 4(a)(2) of the Securities Act. (17 C.F.R. 230.506).

[16] Section 926 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“the Dodd-Frank Act”) required the Commission to adopt rules that disqualify certain securities offerings from reliance on Rule 506 of Regulation D. See Disqualification of Felons and Other “Bad Actors” from Rule 506 Offerings, Release No. 33-9414 (July 10, 2013), available at http://www.sec.gov/rules/final/2013/33-9414.pdf.

[17] See Rule 506(d)(1)(iii) of the Securities Act of 1933. (17 C.F.R. 230.506(d)(1)(iii)).

[18] See id.

[19] In the Matter of Deutsche Bank AG, CFTC Docket No. 15-20, at 44 (Apr. 23, 2015), available at http://www.cftc.gov/ucm/groups/public/@lrenforcementactions/documents/legalpleading/enfdeutscheorder042315.pdf.

[20] See, e.g., In the Matter of JPMorgan Chase Bank, NA, CFTC Docket No. 14-01, at 18 (Oct. 13, 2013), available at http://www.cftc.gov/ucm/groups/public/@lrenforcementactions/documents/legalpleading/enfjpmorganorder101613.pdf; CFTC v. Royal Bank of Canada, 13 Civ 2497, at 14 (Dec. 18, 2014), available at http://www.cftc.gov/ucm/groups/public/@lrenforcementactions/documents/legalpleading/enfrbcorder121814.pdf.

LLOYDS BANKING GROUP AND LLOYDS BANK AGREE TO PAY $105 MILLION TO SETTLE INTEREST RATE MANIPULATION CHARGES

FROM:  COMMODITY FUTURES TRADING COMMISSION 

CFTC Charges Lloyds Banking Group and Lloyds Bank with Manipulation, Attempted Manipulation, and False Reporting of LIBOR

Banks agree to a $105 million settlement and agree to changes in systems and controls

Washington, DC -- The U.S. Commodity Futures Trading Commission (CFTC) today issued an Order againstLloyds Banking Group plc and Lloyds Bank plc, formerly known as Lloyds TSB Bank plc (Lloyds TSB), bringing and settling charges for acts of false reporting and attempted manipulation of the London Interbank Offered Rate (LIBOR) for Sterling, U.S. Dollar, and Yen committed by employees of Lloyds TSB and HBOS plc (HBOS), which was acquired by Lloyds Banking Group in January 2009. The Order finds that, in a few instances, Lloyds TSB was successful in its manipulation of Sterling LIBOR and Yen LIBOR. The CFTC also brought and settled charges that Lloyds TSB, at times, aided and abetted the attempts of derivatives traders at Rabobank to manipulate Yen LIBOR.

The Order requires Lloyds Banking Group and Lloyds Bank to pay a $105 million civil monetary penalty, cease and desist from their violations of the Commodity Exchange Act, and to adhere to specific undertakings to ensure the integrity of LIBOR submissions in the future.

“By today’s action, Lloyds is being held accountable for serious misconduct,” said Aitan Goelman, CFTC Director of Enforcement. “The CFTC remains committed to taking all actions necessary to ensure the integrity of the markets we oversee.”

The unlawful conduct of Lloyds Banking Group and Lloyds Bank undermined the integrity of LIBOR, a critical global interest rate benchmark that is the basis of trillions of dollars of financial instruments. The CFTC Order finds that Lloyds Banking Group and Lloyds Bank, through Lloyds TSB and HBOS, attempted to manipulate LIBOR, at times successfully, to benefit cash and derivatives trading positions. The Order also finds that HBOS altered and lowered its Sterling and U.S. Dollar LIBOR submissions to protect its reputation at the time HBOS was being acquired by Lloyds Banking Group. (Excerpts of submitter communications follow this release.)

In a related action, the U.S. Department of Justice (DOJ) entered into a deferred prosecution agreement with Lloyds Banking Group, deferring criminal wire fraud charges in exchange for Lloyds Banking Group continuing to cooperate and agreeing to an $86 million penalty. In addition, the United Kingdom Financial Conduct Authority (FCA) issued a Final Notice regarding its enforcement action against Lloyds Bank and Bank of Scotland plc (a subsidiary of HBOS) and imposed collectively on both firms a penalty of £105 million (approximately $179 million).

Highlights of the CFTC’s Order

• Before the acquisition of HBOS by Lloyds Banking Group in January 2009, the Sterling and U.S. Dollar LIBOR submitters at each bank individually altered LIBOR submissions on occasion to benefit the submitters’ and traders’ cash and derivatives trading positions. Upon the consolidation of the two companies, the submitters, who were located in separate offices, coordinated with one another to adjust LIBOR submissions to benefit their respective trading positions.
  
• From at least mid-2006 to October 2008, the Lloyds TSB Yen LIBOR submitter colluded with the Yen LIBOR Submitter at Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A. (Rabobank) to adjust their respective Yen LIBOR submissions to benefit the trading positions of Lloyds TSB and Rabobank.
  
• During the global financial crisis in the last quarter of 2008, HBOS, through the acts of its submitters and a manager, improperly altered and lowered HBOS’s Sterling and U.S. Dollar LIBOR submissions to create a market perception that HBOS was relatively financially healthy and not a desperate borrower of cash. Specifically, the manager who supervised the HBOS Sterling and U.S. Dollar LIBOR submitters directed the submitters to make LIBOR submissions at the rate of the expected published LIBOR so that the bank did not stand out as a material outlier from the rest of the submitting banks. The submitters followed these instructions, making submissions through the end of the year that did not reflect their honest assessment of HBOS’s cost of borrowing unsecured interbank funds, and, accordingly, were not consistent with the BBA LIBOR definition.
  
• In 2006, Lloyds TSB and HBOS submitters on certain occasions increased their bids for Sterling in the cash market in an attempt to manipulate the published Sterling LIBOR fixing higher, thereby benefitting specific trading positions that were tied to Sterling LIBOR.

The Order also recognizes the cooperation of Lloyds Banking Group and Lloyds Bank with the Division of Enforcement in its investigation.

The CFTC acknowledges the valuable assistance of the DOJ, the Washington Field Office of the Federal Bureau of Investigation, and the FCA.

CFTC Division of Enforcement staff members responsible for this case are Jason T. Wright, Anne M. Termine, Jonathan K. Huth, Philip P. Tumminio, Rishi K. Gupta, Maura M. Viehmeyer, Elizabeth Padgett, Jordan Grimm, Terry Mayo, James A. Garcia, Kassra Goudarzi, Boaz Green, Aimée Latimer-Zayets, and Gretchen L. Lowe.

* * * * * * *

With this Order, the CFTC has now imposed penalties of over $1.87 billion on entities for manipulative conduct with respect to LIBOR submissions and other benchmark interest rates. See In re RP Martin Holdings Limited and Martin Brokers (UK) Ltd., CFTC Docket No. 14-16 (May 15, 2014) ($1.2 Million penalty) (CFTC Press Release 6930-14); In re Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A. (Rabobank), CFTC Docket No. 14-02, (October 29, 2013) ($475 Million penalty) (CFTC Press Release 6752-13); In re ICAP Europe Limited,CFTC Docket No. 13-38 (September 25, 2013) ($65 Million penalty) (CFTC Press Release 6708-13); In re The Royal Bank of Scotland plc and RBS Securities Japan Limited, CFTC Docket No. 13-14 (February 6, 2013) ($325 Million penalty) (CFTC Press Release 6510-13); In re UBS AG and UBS Securities Japan Co., Ltd., CFTC Docket No. 13-09) (December 19, 2012) ($700 Million penalty) (CFTC Press Release 6472-12); In re Barclays PLC, Barclays Bank PLC, and Barclays Capital Inc., CFTC Docket No. 12-25 (June 27, 2012) ($200 Million penalty) (CFTC Press Release 6289-12). In these actions, the CFTC ordered each institution to undertake specific steps to ensure the integrity and reliability of the benchmark interest rates.

Examples of Misconduct from Written Communications

Examples of Requests for Skewed Sterling LIBOR Submissions

March 6, 2009: (emphasis added)

Former HBOS Sterling Submitter: I am paying on 12 yards of 1s today; a re-fix against Group, so if is there any way of making 1s relatively low, it would be helpful for us all. [. . .] I think it is going to be about 126 or something, maybe 128, it is a tricky one at the moment.

Lloyds TSB Sterling Submitter: Well I could, I mean I have left mine at 125 mate, I mean.

Former HBOS Sterling Submitter: Yeah, well I that will be perfect. As long as you—you can’t go lower than 125, if you are going at 125 that is what, that is what I am hoping to shape it down to, so if you can do that, that would be great.

Lloyds TSB Sterling Submitter: Yeah I have got a fixing small one nowhere near 12 yards, so yeah I do it at 25, alright?

Former HBOS Sterling Submitter: And I am a payer the 3s as well, I don’t know what were you thinking of going in the 3s. [. . .] I have only 500 quid the 3s so I am not that—it’s not the end of the world, but if you’re the other way around don’t worry about it.

Lloyds TSB Sterling Submitter: No, no, no, I have got a small loan going out but it is less than that, alright I will probably have to go 90- probably 96 but I will let you know before, I do 25 definitely for 1s and I will speak to you on—

Former HBOS Sterling Submitter: Yeah don’t stress mate, go 25 in the 1s and just go with what you can in the 3s. No great stress.

Lloyds TSB Sterling Submitter: Yeah, no problem.

Former HBOS Sterling Submitter: Alright thanks.

March 31, 2009: (emphasis added)

Former HBOS Sterling Submitter: [. . .] I was just going to say, I am receiving on 3s LIBOR today on a couple on—on a big reset on about 2 and a half yards and I am receiving tomorrow on 5 yards, so on the LIBOR front obviously I don’t know if you have got anything contrary to that, but if you haven’t the firmer the better please.

Lloyds TSB Sterling Submitter: The higher the better.

Former HBOS Sterling Submitter: Yes please.

Lloyds TSB Sterling Submitter: Oh mate, I have always got loads of loans going out at the end of the month so I always try and fix it higher, so. Trouble is mate they keep calling it fucking lower, I can’t work out why it is fucking going down all the time. [. . .] I mean we put 67 in yesterday, I will leave it at 67 and I won’t go any lower, right?

Former HBOS Sterling Submitter: Yeah.

Lloyds TSB Sterling Submitter: What do you need, and what was the other period, was it all 3s?

Former HBOS Sterling Submitter: No just 3s today and tomorrow.

Lloyds TSB Sterling Submitter: Okay, we will leave it at 67.

Former HBOS Sterling Submitter: Yeah cool, just 1s I am small receiving today, tomorrow is a massive one in the 1s. I am paying but we’ll worry about 1s tomorrow?

Lloyds TSB Sterling Submitter: Well luckily not today mate because I have got trillions and billions of 1s going out today, tomorrow I can set it slightly lower.

Former HBOS Sterling Submitter: Yeah that’s cool, I am receiving 1s today in the yard, tomorrow I am paying on 11.5 yards. [. . .] In the 1s but we will worry about it tomorrow, tomorrow.

Lloyds TSB Sterling Submitter: Yeah, okay mate no problem

April 1, 2009:

Lloyds TSB Junior Trader: Just a quick question: do you have lots of 1s fixing today? Do you want us to keep the libor higher?

Former HBOS Sterling Submitter: Yeah, I have a big liability fix, so as low as possible, please. [. . .] But I have a massive asset fix in the 3s, so as high as you can in the 3s.

Lloyds TSB Junior Trader: Oh, right. Okay, okay. Got it.

Examples of Requests for Skewed U.S. Dollar LIBOR Submissions

January 17, 2008:

HBOS Trader: 3mth higher today pls!

HBOS U.S. Dollar Submitter: Should be 92 for guide ill put in 93 to get couunted.

May 11, 2009:

Former HBOS U.S. Dollar Submitter to Trader Who Assisted Lloyds TSB U.S. Dollar Submitter: when we have big resets as to be honest we shoudl be co ordinating the libor inputs to suit the books. for example later this month i have a 5y 3 month liability reset so we shoudl put in a low one there ill let u know.

May 19, 2009:

Lloyds TSB U.S. Dollar Submitter to Former HBOS U.S. Dollar Submitter: we got the LIBORs down for you.

Examples of Collusion between the Lloyds TSB Yen LIBOR Submitter and the Rabobank Yen LIBOR Submitter

June 27, 2006: (emphasis added)

Rabobank Yen Submitter: just for your info skip...i need a high 1mth today - so i will be setting an obseenly high 1 mth (6)

Lloyds TSB Yen Submitter: sure mate no worries...give us an idea where and I’ll try n oblige...;)

July 27, 2006: (emphasis added)

Rabobank Yen Submitter: morning skip....my little …[racial epithet redacted] friend in tokyo wants a high 1m fix from me today....am going to set .37 - just for your info sir

Lloyds TSB Yen Submitter: that suits mate as got some month end fixings so happy to ablige..rubbery jubbery..:-O

January 5, 2007:

Rabobank Yen Submitter: need a high 1mth fix today mate - just for info ;)

Lloyds TSB Yen Submitter: suits (bu)

Rabobank Yen Submitter: (b)

Lloyds TSB Yen Submitter: just b4 you beat me up....I was in meeting so didn’t do me libors today...thk they put .52 for 1s....

March 19, 2008: (emphasis added)

Rabobank Yen Submitter: [Rabobank Senior Yen Trader] needs a high 6m libor if u can help skip - asked me to set 1.10

Lloyds TSB Yen Submitter: oops my 6s is 1.15!!! he’ll love me

Rabobank Yen Submitter: hahaha so di i!

Lloyds TSB Yen Submitter: send him my regards the lovely fella....

March 28, 2008: (emphasis added)

Rabobank Yen Submitter: morning skip – [Rabobank Senior Yen Trader] has asked me to set high libors today - gave me levels of 1m 82, 3m 94....6m 1.02

Lloyds TSB Yen Submitter: sry mate can’t oblige today...I need em lower!!!

Rabobank Yen Submitter: yes was told by jimbo...just thought i’d let you know why mine will be higher ...and you don’t get cross with me

Lloyds TSB Yen Submitter: never get cross wiv yer mate

June 27, 2006: (emphasis added)

Lloyds TSB Yen Submitter: mrng mate...my turn today...what u going 3s libor...hoping for a higher one....0.35 or u think that is pushing it a bit?

Rabobank Yen Submitter: nope - fine with me mate - will set 35 for you (b)

Lloyds TSB Yen Submitter: (K) cheers dude

Rabobank Yen Submitter: no prob at all mate ;)

July 19, 2007:

Lloyds TSB Yen Submitter: mrng beautiful.....if u can would love a low fixing in 3s libor today....(y)

Rabobank Yen Submitter: ok skip - what u need? no prob

Lloyds TSB Yen Submitter: .77 if poss but just no higher than yest!!

January 7, 2008: (emphasis added)

Lloyds TSB Yen Submitter: plse may i have a nice high 1m libby today..grovel grovel...(k). [. . .]

Rabobank Yen Submitter: yes nice and toasty....what would you like me to set for 1m mate? i’ve gone 70 so far....or hogher?

Lloyds TSB Yen Submitter: thats fine..thx lad xx

Examples of Communications Relating to HBOS Lowering Its U.S. Dollar and Sterling LIBOR Submissions to Protect Its Market Reputation

May 6, 2008:

HBOS Senior Manager to Two Other HBOS Senior Managers and Other HBOS Personnel: it will be readily apparent that in the current environment no bank can be seen to be an outlier. The submissions of all banks are published and we could not afford to be significantly away from the pack.

August 8, 2008: (emphasis added)

HBOS Senior Manager to HBOS Managers and Senior Managers: As a bank we are extremely careful about the rates we pay in different markets for different types of funds as paying too much risks not only causing a re-pricing of all short term borrowing but, more importantly in this climate, may give the impression of HBOS being a desperate borrower and so lead to a general withdrawal of wholesale lines.

September 26, 2008:

HBOS U.S. Dollar LIBOR Submitter to an Employee of Another Financial Institution: youll like this ive been pressured by senior management to bring my rates down into line with everyone else.

October 21, 2008:

HBOS LIBOR Supervisor to HBOS Sterling LIBOR Submitters: do not want to be an outlier in BBA submissions - this could potentially create an issue with buyers of our paper.

October 30, 2008:

HBOS LIBOR Supervisor HBOS LIBOR Submitters: continue to post levels at or slightly above the level we will pay for deposits or issue [certificates of deposit].

- - - - - - - - - - - - - - -

Footnote from page 6 of the CFTC Order:  The communications quoted in this Order contain shorthand trader language and many typographical errors.  The shorthand and errors are explained in brackets within the quotations only when deemed necessary to assist with understanding the discussion.

Media Contact
Dennis Holden
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Last Updated: July 28, 2014

CFTC CHAIRMAN GARY GENSLER COMMENTS ON LIBOR

FROM: COMMODITY FUTURES TRADING COMMISSION
Remarks of Chairman Gary Gensler on Libor before the Global Financial Markets Association’s Future of Global Benchmarks Conference
February 28, 2013

Good morning. Thank you, Ken, for that kind introduction. I also want to thank the Global Financial Markets Association for the invitation to speak at your conference on the Future of Global Financial Benchmarks.

This conference comes at a critical juncture.

It comes as there has been a lot of media attention surrounding the three enforcement cases against Barclays, UBS and RBS for manipulative conduct with respect to the London Interbank Offered Rate (LIBOR) and other benchmark interest rate submissions.

More importantly, it comes as market participants and regulators around the globe have turned to consider the critical issue of how we reform and revise a system that has become so reliant on LIBOR and similar rates.

I believe that continuing to reference such rates diminishes market integrity and is unsustainable in the long run.

Let’s look at what we’ve learned to date.

First, the interbank, unsecured market to which LIBOR and other such rates reference has changed dramatically. Some say that it is has become essentially nonexistent. In 2008, Mervyn King, the governor of the Bank of England, said of LIBOR: "It is, in many ways, the rate at which banks do not lend to each other."

There has been a significant structural shift in how financial market participants finance their balance sheets and trading positions. There is an increasing shift from borrowing unsecured (without posting collateral) toward borrowings that are secured by posting collateral. In particular, this shift has occurred within the funding markets between banks.

The London interbank, unsecured market used to be where banks funded themselves at a wholesale rate. But the 2008 financial crisis and subsequent events have shattered this model.

The European debt crisis that began in 2010 and the downgrading of large banks’ credit ratings have exacerbated the hesitancy of banks to lend unsecured to one another.

Other factors have played a role in this structural shift. Central banks are providing significant funding directly to banks. Banks are more closely managing demands on their balance sheets. And looking forward, recent changes to Basel capital rules will take root and will move banks even further from interbank lending.

The Basel III capital rules now include an asset correlation factor, which requires additional capital when a bank is exposed to another bank. This was included in the new standards to reduce financial system interconnectedness.

Furthermore, the rules introduce provisions for a liquidity coverage ratio (LCR). For the first time, banks will have to hold a sufficient amount of high quality liquid assets to cover their projected net outflows over 30 days.

At a roundtable on financial market benchmarks held in London last week, one major bank indicated that the LCR rule alone would make it prohibitively expensive for banks to lend to each other in the interbank market for tenors greater than 30 days. Thus, this banker posited that it is unlikely that banks will return to the days when they would lend to each other for three months, six months or a year.

Second, we also have learned that LIBOR – central to borrowing, lending and hedging in our economy – has been readily and pervasively rigged.

Barclays, UBS and RBS were fined $2.5 billion for manipulative conduct by the CFTC, the UK Financial Services Authority (FSA) and the Justice Department. At each bank, the misconduct spanned many years, took place in offices in several cities around the globe, included numerous people – sometimes dozens, even included senior management, and involved multiple benchmark rates and currencies. In each case, there was evidence of collusion.

In the UBS and RBS cases, one or more inter-dealer brokers painted false pictures to influence submissions of other banks, i.e., to spread the falsehoods more widely. Barclays and UBS also were reporting falsely low borrowing rates in an effort to protect their reputation.

These findings are shocking, though the lack of an interbank market made the system more vulnerable to such misconduct.

Third, we have seen a significant amount of publicly available market data that raises questions about the integrity of LIBOR today.

A comparison of LIBOR submissions to the volatilities of other short-term rates reflects that LIBOR is remarkably much more stable than any comparable rate. For instance, how is it that in 2012 – if we look at the 252 submission days for three-month U.S. dollar LIBOR – the banks didn’t change their rate 85 percent of the time?

Why is it that some banks didn’t change their submissions for three-month U.S. Dollar LIBOR for upwards of 115 straight trading days? This means that one bank said the market for its funding was completely stable for 115 straight trading days or more than five months.

When comparing LIBOR submissions to the same banks’ credit default swaps spreads or to the broader markets’ currency forward rates, why is there a continuing gap between LIBOR and what those other market rates tell us?

In the fall of 2011, there was so much uncertainty in markets due to the European debt crisis and challenges here in the United States. How is it that a number of the banks were still saying they could borrow in the interbank market for one year at about 1 percent, even though the traded markets for the same institutions’ one-year credit default swaps were trading four or five times higher?

Further, there’s a well-known concept in finance called interest rate parity, basically that currency forward rates will align with interest rates in two different economies. Why is it that since the financial crisis, that has not been the case, whether looking at the dollar versus the euro, sterling or yen? Theory hasn’t been aligning with practice. The borrowing rate implied in the currency markets is quite different than LIBOR.

Nassim Nicholas Taleb, whom you may know as the bestselling author of The Black Swan, has written a recent book called Antifragile: Things that Gain from Disorder. His main theme is: "Just as human bones get stronger when subjected to stress and tension … many things in life benefit from stress, disorder, volatility, and turmoil."

He notes that systems that are fragile succumb to stress, tension and change. Systems that are not readily able to evolve and adapt are fragile.

One of his main points is that propping up a fragile system in the interest of maintaining a sense of stability only creates more instability in the end. One can buy an artificial sense of calm for a while, but when that calm cracks, the resulting turmoil is invariably greater.

I think that the financial system’s reliance on interest rate benchmarks, such as LIBOR and Euribor, is particularly fragile.

These benchmarks basically haven’t adapted to the significant changes in the market. The interbank, unsecured lending market, particularly for longer tenors, is essentially nonexistent. LIBOR and similar benchmarks have been readily and pervasively rigged. And there is substantial market data that raises questions about LIBOR’s continuing integrity.

Thus, the challenge we face is how does the financial system adapt to this significant shift?

At the London roundtable on financial market benchmarks held last week, a man approached me to discuss a bit of the history of LIBOR in which he had personally been involved. It seems that in 1970, as a young banker, he worked on a floating rate note deal for ENEL issued by Bankers Trust that used a reference rate called LIBOR.

A lot has changed since 1970 – Nixon was President, we were in the midst of the Vietnam War, the Beatles released their final album Let It Be, and I was a kid wearing bell-bottoms.

Sixteen years later, the British Bankers Association (BBA) began publishing LIBOR as we know it today. A lot has changed since 1986 – Reagan was President, we were in the midst of the Cold War, and I was dating the wonderful woman I would marry, Francesca.

And now, I have three wonderful daughters but am a single dad. In life, one must adapt to change.

Yet LIBOR – embedded in the wiring of our financial system – largely remains the same.

This is why international regulators and market participants have begun to discuss transition. The CFTC and the FSA are co-chairing the International Organization of Securities Commissions (IOSCO) Task Force on financial market benchmarks. The task force is developing international principles for benchmarks and examining best mechanisms or protocols for a benchmark transition, if needed.

In January, the task force published the Consultation Report on Financial Benchmarks, and a final report will be published this spring.

One of the key questions in the consultation is how do we address transition when a benchmark is no longer tied to sufficient transactions and may have become unreliable or obsolete?

The consultation seeks public input about transition in two contexts:

• Prospectively, the consultation suggests that contracts referencing a benchmark would be more resilient if those contracts had embedded in them a contingency plan for when a benchmark may become obsolete.

• And perhaps more challenging, the consultation asks what to do about existing contracts that reference a benchmark that becomes obsolete, if those contracts don’t have an effective contingency plan.

Martin Wheatley of the FSA recommended that Canadian dollar LIBOR and Australian dollar LIBOR cease to exist so a transition is necessary, at least for those reference rates.

The market has some experience with transition, albeit for smaller contracts, such as for energy and shipping rate benchmarks. The basic components of such a transition include identifying a new and reliable benchmark, one that is anchored in transactions. The new and existing benchmarks run in parallel for a period of time to allow market participants to transition.

A critical statement in the consultation report was: "The Task Force is of the view that a benchmark should as a matter of priority be anchored by observable transactions entered into at arm’s length between buyers and sellers in order for it to function as a credible indicator of prices, rates or index values."

It went on to say: "However, at some point, an insufficient level of actual transaction data raises concerns as to whether the benchmark continues to reflect prices or rates that have been formed by the competitive forces of supply and demand."

I agree with both of these statements. A reference rate has to be based on facts, not fiction.

Without transactions, the situation is similar to trying to buy a house, when your realtor can’t give you comparable transaction prices in the neighborhood – because no houses were sold in the neighborhood in years.

Given what we know now, it’s critical that we move to a more robust framework for financial benchmarks, particularly those for short-term, variable interest rates. There are alternatives that market participants are considering that are grounded in real transactions. These include the overnight index swaps rate, benchmark rates based on actual short-term collateralized financings, and benchmarks based on government borrowing rates.

There are important ongoing international efforts to come up with principles for financial market benchmarks. These principles will address governance, conflicts of interest and transparency of reporting.

Nevertheless, even if we’re able to address these issues, there remains the issue of whether LIBOR and similar rates continue to reference an underlying market that is essentially nonexistent.

I recognize that moving on from LIBOR may be challenging. Today, LIBOR is the reference rate for 70 percent of the U.S. futures market, most of the swaps market and nearly half of U.S. adjustable rate mortgages.

I recognize that moving on from LIBOR may be unpopular. But as the author Nassim Taleb might suggest, it would be best not to fall prey to accepting that LIBOR or any benchmark is "too big to replace."

I believe that the best way to promote both market integrity and long-term stability is by ensuring that benchmarks are reliable and honest. And I believe it’s critical to work together to promote a smooth transition, where needed.

I recognize that change can be hard, but change is also a natural part of life.

After all, I’m sure you’re relieved I didn’t show up in bell-bottoms today.