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7 years ago

Dealing with Libor manipulation

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A couple of years ago when the report on Libor manipulation came out, I wrote an article wherein my suggestion was for our banks and financial institutions to do some homework to determine whether there is likely scope of underpayment or overpayment due to Libor manipulation.

 

 

I am not sure whether the concerned authority has taken this Libor manipulation issue seriously. It is true that lion's share of our foreign exchange transaction i.e., import and export must have interest bearing on Libor and even holding US dollar balance in Nostro (Foreign currency account maintained with foreign banks) Account might have interest bearing on Libor. So, unearthing Libor manipulation and its aftermath must have direct or indirect impact in our past foreign currency transactions and accordingly necessary correction / revision with retrospective effect may have to be carried out.         

 

 

Libor (London Interbank Offered Rate) manipulation was one of the most serious financial scandals in post-2008 financial crisis era. Libor is considered and accepted as the benchmark rate by banks and financial institutions all over the world to determine the pricing on various loans sanctioned. This benchmark rate setting is managed by British Bankers' Association (BBA) and followed all over the world. Trillions of dollar transactions in US dollar denomination are paid using Libor set by BBA. It was detected that during the period from 2006 to September 2010, rigging was done while setting Libor, and as a result, all transactions with Libor interest bearing have poised serious problems. Many internationally reputed banks and financial institutions were allegedly involved in Libor manipulation. Barclays Bank, Royal Bank of Scotland, UBS, Deutsche Bank AG, Citigroup Financial, HSBC Holdings, JP Morgan Chase which are known as internationally reputed financial institutions were alleged to have been involved in Libor rigging. Initially, Financial Regulator in the UK fined $9 billion to those alleged banks and financial institutions and Deutsche Bank AG alone paid $2.5 billion. Subsequently, Commodity Future Trading Commission, the U.S Department of Justice and the U.K. market regulators unearthed some proofs based on which the regulators have sued in the Crown Court of U.K., where the judgment was declared with imprisonment of the main accused. Consequent upon this court judgment, some customers who are adversely affected following Libor manipulation have filed class action suit in the US court. It may be mentioned here that class action case is a very common practice in US and Canadian legal system where some group of affected people collectively file legal suit for their remedy.

 

 

It is now learnt that only those who have been underpaid have filed class action case, trial of which is still continuing. Although this class action case is pending, the banks which were involved in Libor rigging have already started reimbursing compensation to the affected people. So far as I know, Barclays bank, which was one of the accused of Libor manipulation, have openly invited the affected parties to submit their claims for compensation arising out of manipulative lower Libor. In their open invitation they have clearly mentioned that those who have bought Libor interest bearing instrument in US dollar denomination from Barclays bank in the USA and owned this instrument during the period from August 2007 to May 2010 will be entitled to receive compensation. They have set up Dec 21, 2017 as the deadline for submission of claim of compensation under Libor rigging. However, the affected party has open option to either realise compensation from the Barclays bank or file legal suit under class action settlement case. If neither action is taken by the given deadline, Barclays bank will not entertain any subsequent claim because the bank will then have to abide by the court order expected to be issued in the judgement.

 

 

So, banks in Bangladesh and even our central bank should review their foreign exchange transactions where Libor interest was applied and if found they have been underpaid, they should consider submitting claim for reimbursement. I believe other banks which were found guilty in Libor rigging might have taken similar step of compensating the affected parties.

 

 

Needless to say, this is the first phase of settlement of Libor manipulation where only depositors who were underpaid are being reimbursed. Second phase of settlement will come later when borrowers, especially large corporate borrowers, who have paid interest on their billion dollar loans may come with their logical demand for reimbursing excess interest paid for manipulated Libor. Even banks which have realised less Libor interest on foreign exchange transaction with their counterparts will also submit counterclaim of compensation. If such claim is submitted, all transacting banks will have to entertain and there is no way to avoid it. Even our business people whose LCs have been handled during Libor rigging period may be informed that in consequence of unearthing Libor manipulation, additional payment may have to be paid if demanded by the foreign correspondent banks. This is required for making our business people fully aware of the situation and as part of prior preparation for necessary reimbursement, if required. We have to keep in mind that we can easily forego our claim but cannot avoid the claim submitted by our foreign counterparts. If we try to ignore the claim of reimbursement received from foreign correspondent banks, consequence thereof will be so severe that carrying out international transaction in US dollar denomination will become almost impossible. 

 

 

Our bankers may not consider this Libor manipulation issue so seriously assuming the impact in dollar value insignificant, which is not correct. Although the degree of impact depends on the volume of transaction, yet the matter cannot be so less that it can be ignored. A hypothetical example will clarify the situation. If a bank of our country retained USD 10 million in the form of Libor interest bearing instrument with foreign bank and manipulative Libor 45 bps instead of actual Libor 95 bps was applied on this amount during the entire period from 2006 to 2009, our bank might have been underpaid by USD 200,000.00. So, this bank is entitled to claim reimbursement of this amount from the bank with which deposit has been maintained. Opposite situation may arise if a bank of our country enjoyed overdrawn limit or channelled import payments on an average USD 20 million every year which had borne interest on Libor during the entire period, this bank has underpaid the foreign counterpart USD 400,000.00.

 

 

We have to keep in mind that foreign banks will first compensate their counterparts by reimbursing underpaid amount and then they will submit their own claim of receiving fewer amounts due to Libor manipulation. Technically, they will be forced to submit this claim by their affected customers. If our banks can submit their claim and realise due reimbursement, then they will be able to minimise their counter payment when necessitated, otherwise full amount  likely to be claimed by correspondent bank will have to be reimbursed.

 

 

Therefore, our central bank and commercial banks should take this Libor manipulation issue very seriously and closely follow up its aftermath, prepare themselves and act accordingly so that any loss arising out of Libor rigging can be kept at the minimum. If we fail to take timely action in this regard, we will have to reimburse fully and forego our legitimate right which will eventually increase our overall losses arising out Libor manipulation. 

 

 

Nironjan Roy is a banker based in Toronto, Canada. [email protected]

 

 

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