03 July 2013

Singapore's SIBOR Scandal

On 14 June, The Monetary Authority of Singapore ("MAS") announced that it had completed a year-long review of the processes relating to submissions of benchmarks[1] by banks in Singapore.[2]

The review covered the Singapore dollar interest rate benchmarks — the Singapore Interbank Offered Rates ("SIBOR", the less well-known cousin of LIBOR, see below) and swap offered rates ("SOR") — and foreign exchange ("FX") spot benchmarks ("FX Benchmarks") used to settle non-deliverable forward FX contracts, between 2007 and 2011.
 
Based on its findings, MAS censured 20 banks and directed them to address their deficiencies in governance, risk management, internal controls, and surveillance systems, relating to these processes.  The banks were ordered to set aside additional statutory reserves with MAS at zero interest for one year.
 
133 traders were found to have engaged in several attempts to inappropriately influence the benchmarks.  While there was no conclusive finding that any benchmark was successfully manipulated, MAS considered their conduct to reflect a lack of professional ethics.
 
Disciplinary action was taken against the traders involved by their employer banks.  Most have resigned from or have been asked to leave their banks.  Those who remain employed by their banks have been, or will be, subject to disciplinary actions.
 
MAS has referred some cases to the Commercial Affairs Department and the Attorney-General’s Chambers.  Based on the available information and evidence, MAS said that no criminal offence under current Singapore law appears to have been committed.
 
LIBOR Scandal
LIBOR (London Interbank Offered Rate) is the trimmed arithmetic mean of the rates that certain contributing banks consider that they can borrow funds in a reasonable market size at a specific time of the day.
 
LIBOR is the primary benchmark for a wide range of financial products globally.  Hundreds of trillions of dollars of contracts, instruments and transactions reference it.
 
As early as 16 April 2008, The Wall Street Journal published a report that questioned the integrity of LIBOR.[3]
 
At the onset of the financial crisis in September 2007, banks and other analysts began to scrutinise other banks' LIBOR submissions closely.  A contributing bank might be tempted to manipulate its LIBOR submissions in order to give outsiders a healthier picture of its credit quality and its ability to raise funds from the markets than was the case in reality.[4]
 
Company treasurers noted that interest rates quoted on their screens did not match LIBOR.  However, this was explained away by divergence of rates among banks and the unwillingness of some banks to lend.  Besides, each contributing bank's LIBOR was its estimate of its own borrowing costs, even if it did not, or did not need to, borrow that day.[5]
 
(There was another motivation to manipulate LIBOR.  Some contributing banks wanted to influence interest rate benchmarks to benefit their own trading positions.)
 
By the end of 2007, The Federal Reserve Bank of New York, US Commodity Futures Trading Commission, UK Financial Services Authority and British Bankers' Association knew about Barclays's then-purported manipulation of LIBOR.
 
On 27 June 2012, Barclays admitted to misconduct and was fined by FSA, CFTC and US Department of Justice.  RBS, UBS and other banks were also fined.[6]
 
Relevance of LIBOR Scandal
MAS started its review in mid-2012 of the processes relating to submissions of benchmarks by banks, four years after The Wall Street Journal article on the LIBOR scandal.
 
SIBOR's role is similar to LIBOR's.  Both are determined in a similar fashion.
 
Did none of the bank supervisory agencies in the US and the UK share their information with MAS?
 
What did MAS do after The Wall Street Journal article was published on 16 April 2008?
 
People Here Are Not Different
In or around July 2012, Association of Banks in Singapore ("ABS") chairman Piyush Gupta (who is also DBS Bank CEO) said that the LIBOR-fixing scandal in Europe and the US was unlikely to occur in Singapore as ABS had sufficient controls to check that the rates were consistent.[7]
 
Though somewhat surprised by his opinion, I was hopeful that he was right.
 
But as noted above, MAS found that 133 traders had engaged in several attempts to inappropriately influence the benchmarks, although there was no conclusive finding that the benchmarks were successfully manipulated.
 
We should not assume that people in Singapore — whether citizens, permanent residents or foreigners — are different from people elsewhere in the world.  There will likely be some people who will not uphold the high standards of ethical conduct that society expects of them.
 
Proposed Regulatory Framework[2]
MAS will introduce criminal and civil sanctions under the Securities and Futures Act for manipulation of any financial benchmark.
 
MAS intends to subject the setting of key financial benchmarks, which have systemic importance and are susceptible to manipulation, to regulatory oversight.
 
MAS will license the administrator and submitters of key benchmarks and subject them to regulatory requirements.
 
Association of Banks in Singapore's Response[8]
On 14 June 2013, ABS and Singapore Foreign Exchange Markets Committee announced changes to the way benchmarks are calculated.
 
Of the 11 benchmarks quoted in Singapore, four will be discontinued (timely spring cleaning) and two will be replaced with benchmarks from other jurisdictions.
 
US$ SIBOR will be replaced with US$ LIBOR, the reference rate published in the UK and the most widely used US$ interest rate benchmark globally.
 
Four of the five remaining benchmarks will be calculated using market transactions (with information from electronic trading platforms), which will ensure a direct and automated link between market trading activity and benchmark computation, instead of by surveyed submissions.
 
S$ SIBOR, which the majority of mortgages in Singapore are pegged to, will continue to be calculated by reference to surveys from banks because it reflects interbank borrowing costs and these costs differ across banks.  Nevertheless, banks will be required to prioritise actual transactions as the basis for their submissions.
 
Governance standards will be enhanced.
 
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Notes

1. A financial benchmark is any price, estimate, rate, index or value that is calculated using a formula and used as a reference to determine (i) the interest payable or other sums due on deposits or loans; (ii) the price, value or performance of any investment product; or (iii) the price, value or performance of any product offered by any entities regulated by MAS.  References to manipulation include any act that is intended or likely to create a false or misleading appearance with respect to the price, value or level of a financial benchmark.

2. THE MONETARY AUTHORITY OF SINGAPORE MAS Proposes Regulatory Framework for Financial Benchmarks 14 Jun 2013.

3. LIBOR’s Value Is Called Into Question ft.com 25 Sep 2007.

4. Every contributor bank was asked "At what rate could you borrow funds, were you to do so by asking for and then accepting interbank offers in a reasonable market size just prior to 11 a.m.?"
 
Prior to 1998, every contributor bank was asked "At what rate do you think interbank term deposits will be offered by one prime bank to another prime bank for a reasonable market size today at 11a.m.?"

5. Bankers Cast Doubt On Key Rate Amid Crisis The Wall Street Journal 16 Apr 2008.

6. Timeline: LIBOR-Fixing Scandal BBC News 6 Feb 2013.

7. SIBOR Rate-Setting Prudent And Sound, says ABS Chairman The Straits Times 16 Aug 2012.

8. ASSOCIATION OF BANKS IN SINGAPORE Singapore To Enhance Financial Benchmarks 14 Jun 2013.

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