Spotlight Swings to Interdealer Brokers

Gianluca Colla | Bloomberg | Getty Images

The UBS Libor settlement swings the spotlight on to the role of interdealer brokers in the burgeoning scandal, alleging that employees at these institutions actively "colluded" with rate-fixing efforts – and were handsomely rewarded for it.

According to the final notice published by the UK Financial Services Authority, four UBS traders worked through the brokers to try to influence the Japanese yen Libor submissions at other banks. The watchdog says the traders made more than 1,000 requests to 11 employees at six interdealer broker firms.

UBS then paid brokers through "wash trades" – transactions that have no purpose other than to generate fees – and at one point the bank was paying 15,000 a quarter to the brokers for a period of 18 months, the FSA said.

Interdealer brokers act as conduits in the market for large and illiquid trades, talking to a range of bank traders, both by phone and electronically, every day. They do not participate in the daily Libor rate-setting process, in which a group of panel banks submit their estimates of the interest rate they would have to pay to borrow that day and the results are then averaged to set the official benchmark.

The FSA alleges that UBS traders used the middlemen to pass on requests for specific rates to traders at other banks. They also asked the brokers to place false bids and offers – known as "spoofs" – and asked them to manipulate the rates shown on their trading screens to skew market perceptions of the rates and indirectly influence other banks' submissions to the Libor rate-setting process.

In one particularly dramatic example, the FSA notice quotes a UBS trader saying: "if you keep 6s [the six-month yen Libor rate] unchanged today ... I will [expletive] do one humongous deal with you ... Like a 50,000 buck deal, whatever... I need you to keep it as low as possible... if you do that... I'll pay you, you know, 50,000 dollars, 100,000 dollars... whatever you want ... I'm a man of my word".

Up to now, only three interdealer brokers – Icap, RP Martin and Tullett Prebon – had acknowledged receiving information requests from authorities in connection with the global investigation into Libor. Icap and RP Martin have suspended employees or put them on leave in connection with the investigation, but Tullett Prebon said on Wednesday it had not. All three firms have said their institutions were not under investigation.

Two employees of RP Martin and a UBS trader were arrested last week as part of the UK Serious Fraud Office's Libor probe. They were bailed without charge pending further investigation.

The Swiss regulator Finma said in its UBS settlement documents that a single trader, dubbed Trader A, made several hundred requests to different brokers asking them to help influence the rate. The watchdog said Trader A promised brokers additional business and conducted wash trades as a reward for their help.

Its settlement document describes an email exchange between that trader and a broker in August 2008, in which the trader says, "obvious could do with low 6m tonight" and the broker replied, ":-) yep with you mate, low everything" and went on to ask if the trader thinks the broker "is your best broker in terms of value added :-)"?

Trader A responded with a reassuring "yeah, I reckon I owe him a lot more".