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The Next Wall Street Mega-Scandal Has Arrived

Well, it looks like the major financial institutions can't learn a lesson. They're neck deep in yet another financial scandal of global proportions.

U.S. and international securities regulators investigating manipulation of LIBOR, the world's most important set of benchmark interest rates, have uncovered another price-rigging scheme, this one in the $379 trillion market for interest rate swaps.

$379 Trillion, not Billion. Trillion.

The Commodity Futures Trading Commission (CFTC) has already issued subpoenas to Wall Street's biggest banks and is interviewing a dozen former and current brokers from the Jersey City, NJ, offices of ICAP Plc.

For investors in the big banks, new revelations may put an end to the upward push to the groups' stock prices, whose earnings of late have been helped by reductions in reserves meant as a cushion against future asset hits and litigation expenses.

Blackbeard's Legacy

According to a former broker from London-based ICAP's Jersey City swap desk, nicknamed "Treasure Island" for the huge commissions and pay packages traders there are accustomed to, brokers routinely manipulated prices on behalf of bank clients to benefit bank trading desks.

On the other side of the banks' trades are tens of thousands of counterparties who may have lost hundreds of billions of dollars as a result of having to pay more interest, or may have received less interest, on swaps whose prices were manipulated.

ICAP, formerly Intercapital Brokers, initially hit regulators' radar as part of the LIBOR scandal. According to the July 7th, 2012 print edition of the Economist,
"Court documents filed by Canada's Competition Bureau have also aired allegations by traders at one unnamed bank, which has applied for immunity, that it had tried to influence some LIBOR rates in cooperation with some employees of Citigroup, Deutsche Bank, HSBC, ICAP, JPMorgan Chase and RBS."

Far from being in a shady corner in the world of derivatives, interest rate swaps are a mainstream financing tool used by tens of thousands of corporate treasurers worldwide.

Interest rate swap prices are used to set the value of over $550 billion of commercial real estate collateralized bonds and are used to calculate pension annuity values and benefits. (Other examples of where swap rates are used, from the ISDA website, are in the sidebar.)

Big Banks in Big Trouble, Again?

Mega-banks primarily facilitate interest rate swaps by initially taking the other side of customers' trades and are responsible for establishing pricing of these instruments in conjunction with a handful of brokers.

Similarly to how LIBOR is calculated, the ISDAFIX, the benchmark series of rates used to price interest rate swaps for U.S. dollar denominated swaps, is convened by a "panel" of banks.

The panel, according to the International Swaps and Derivatives Association consists of: Bank of America Corp., Barclays, BNP Paribas SA, Citigroup Inc., Credit Suisse AG, Deutsche Bank AG, Goldman Sachs Group Inc., HSBC Holdings Plc, JPMorgan Chase & Co., Mizuho Financial Group Inc., Morgan Stanley, Nomura Holdings Inc., Royal Bank of Scotland, UBS and Wells Fargo & Co.

The banks submit their quotes for a range of maturities to ICAP through a secure screen connection. ICAP then forwards those data points to Thompson Reuters, who calculates the actual swap rates. Rates are then disseminated to over 6,000 viewers.

An Easy Con in an Era of Regulation

Manipulation of rate pricing is easy. ICAP posts rates, supposedly based on transactions and bid and offer quotes it receives and enters manually into what's known as the 19901 screen (named for the Reuters screen page number). Banks don't have to submit their own rates as part of the panel; they can use the suggested rates ICAP posts. Or they submit their own rates to ICAP to be forwarded to Thompson Reuters who calculates the final numbers.

ICAP sits in the middle, entering by-hand prices and rates from the transactions that occur through their brokerage desk, which average a staggering $1.4 trillion a day.

Not only can banks ask ICAP brokers to post whatever quote benefits the bank's internal trading book, whether it's to affect a positive mark-to-market closing price for accounting and profit and loss (bonus) calculations, or manipulate an entry price on a new trade with a counterparty, they allegedly ask ICAP brokers to delay entry of actual transactions until after ISDAFIX rates are disseminated.

The delay can easily create a beneficial entry price on a trade that would otherwise be priced based on fresh data. Manipulation of prices and rates has huge profit and loss and mark-to-market implications in terms of capital reserve ratios and other bank balance sheet metrics.

Of course, these allegations have yet to become indictments, and nothing may come out of any of this but a few little fines and some slapped wrists. And if the past is actually prologue, we can rest assured that no criminal charges will ever be tossed into the casino, since none ever are.

After all, the tumbling dice always favor the house, and we know whose house it is.

Related Articles and News:

Examples of ISDAFIX users

ISDA developed ISDAFIX to facilitate the determination of exercise values for cash-settled swap options. The existence of such a benchmark provides a transparent (in theory), readily available value to which parties to a transaction can refer as a settlement rate. Without such a benchmark, it might be necessary to go through the process of calling a number of active dealers for quotes in order to settle transactions.

The 2006 ISDA Definitions refer specifically to ISDAFIX rates as a means of settlement of over-the-counter derivatives transactions. In the sample Swaption Confirmation in the 2006 ISDA Definitions (Exhibit II-E), for example, the parties can include 'ISDA Source' – that is, ISDAFIX – as the reference settlement rate under Settlement Terms.

ISDAFIX is also used as a reference rate for cash settlement in connection with early terminations of swap transactions. In addition, dealers often use ISDAFIX as an input when marking their swap portfolios to market.

Beyond their use in settling over-the-counter-traded transactions, ISDAFIX rates are also used as a rate or curve source in various exchange products. LIFFE, for example, uses ISDAFIX as the source of the swap curve in calculating the settlement price of its Swapnote futures contract.

In addition, both the Chicago Mercantile Exchange and the Chicago Board of Trade use ISDAFIX as the settlement price in their swap futures contracts. In the United States, the Federal Reserve uses ISDAFIX as the source for USD swap rates in its H.15 Statistical Release.

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About the Author

Shah Gilani is the Event Trading Specialist for Money Map Press. He provides specific trading recommendations in Capital Wave Forecast, where he predicts gigantic "waves" of money forming and shows you how to play them for the biggest gains. In Zenith Trading Circle Shah reveals the worst companies in the markets - right from his coveted Bankruptcy Almanac - and how readers can trade them over and over again for huge gains. He also writes our most talked-about publication, Wall Street Insights & Indictments, where he reveals how Wall Street's high-stakes game is really played.

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  1. Frank M. McCraw, CFA | May 2, 2013

    The easiest, most comprehensive fix for this Damocles sword derivative is exchange listing with standardized credit conditions and terms. Banks fought that obvious reform tooth and nail because brokerage and servicing of custom swaps in an opaque market is incredibly lucrative.

    Exchange listing of interest rate swaps would remove this opacity. "Customization" could be achieved through putting together combinations or changing over time – similar to achieving financial goals through the public listed options markets now, versus the old custom specialist option write.

  2. Archy | May 2, 2013

    We though Obama was going to fix all this? Gee. Maybe not.

  3. Ken blades | May 2, 2013

    Thank you for your column and information. It's hard to decide what's the worst the loss of princibles to make money and not wor k or obamas intitlement program whe got to drains on our way of life ,one financial people,with no shame say and do any thing to make money, people on welfare and what ever else people can collect with out working ' once they get a check with out working for it their incentive is out the window , Obama plays on it. Votes for checks were headed for a collapse like grease ,where has our honor went , sold it for ,money ? Our boys that fought for us in I rack,has more honor than any people I've seen on wall,street or the dead beats in Washington ken

    • Spencer Tracy | May 3, 2013


      You have boys in Irack ? Fighting for what ?

  4. Jorge | May 2, 2013

    "The Next Wall Street Mega-Scandal Has Arrived"

    I am so sick and tired of reading stories like this. Everyone knows what's going on … everyone knows who the crooks are … everyone knows that it's destroying the U.S. and even the world … and everyone knows that it is as illegal as hell. Yet NOTHING gets done about it. Is it fear, i.e., if someone speaks they will be ruined, have an unfortunate 'accident' or run into an untimely demise? Perhaps people know that even their family is at risk should they decide to go against these monsters. Or maybe it's greed – they are making lots of money during this raping and pillaging so why care about the rest of humanity?

    Whatever the case, it's bound to end. No system can withstand the beating that our financial system and just about every sector of our economy is taking every single day. Soon – not too long from now – there will be a collapse. Sadly, it is my belief that this collapse is being orchestrated. These financial terrorists hire some of the best minds – they know what they're doing and the inevitable consequences. So they are busy preparing the next system – the one that they will implement when this one has run its course.

    The only solution is to annihilate the monsters themselves. Is there anyone that will take a stand? Anyone? Or is this just going to continue until that inevitable moment?

    • aubreyfarmer | August 1, 2013

      The wicked hearts and dark souls of those that Christ drove out of the synagogue now inhabit those behind the coming world wide financial collapse. On the ashes the bankers will build a new world that they control. Ephesians 6:12 For we wrestle not against flesh and blood, but against principalities, against powers, against the rulers of the darkness of this world, against spiritual wickedness in high places."
      If it weren't so sad it would almost be entertaining to watch as MSM, Obama and the rest of the lost souls try to explain what has happened. And now we hear Karen Hudes of the World Bank coming forward with revelations of massive fraud, money laundering and theft.

  5. nohomehere | May 2, 2013

    did, anyone make the connection that reuters used to be agance france the media owned by a rothschild now operating banking info dissimination under ´´ Whos¨¨ authority ? bankers decide all and for all and in all the world as one………….

  6. Wayne | May 2, 2013

    Because our government officials have been "bought and paid for" by large banks and financial interests, we will see no corrupt banking executives prosecuted for these crimes or any other crimes. Why should they be prosecuted for manipulating money markets, laundering drug money, or defrauding the public when they are the "backbone" of the financial world and "above the law"? The only thing that will happen will be a light "tap on the wrist" (a few million in fines) as the banks walk away smiling and the CEOs pocket millions in bonuses and stock options. Our justice system has become a joke and it is no wonder that "white collar" crime leads the way to violent "blue collar" crime. The sad reality is that "white collar" crime does more far reaching damage.

  7. Saior Jo | May 2, 2013

    As long as GS has "friends" (like Draghi) everywhere and as long as the POTUS nominates "friends" from the business community as secretaries (and other jobs) nothing will change.

  8. Leslie Belden | May 2, 2013

    We all know who the bad guys are, sure. But without Shah's information and explanations to back up what I tell people about what's happening, I would sound like a paranoid delusional conspiracy theorist.

    Shah has already opened a way to do something about these people by arming us with knowledge. He also has a campaign going to clean the political class out of Washington. It has to start somewhere, and this is a beginning.

    Bernanke may be the Prince of Darkness, for example, but a frontal attack in person is irrational. Since I do believe that reticence is the better part of valor, I'm willing to let Shah pick my battles for me.

  9. Curtis Edmark | May 2, 2013

    Sadly all they have to do is pay off the right people and this one will go away like many others.

  10. Allan Bremner | May 2, 2013

    Obviously, 'Da Fix ISDAFIX!'

  11. Obamarama | May 3, 2013

    Obama is gonna pay for my gas & bills!!!!!!!!

  12. Ken higby | May 3, 2013

    Ever since the markets began there were people behind the curtains pulling the strings manipulating the outcome of other peoples investments so they would get the major percentages of the returns. With the big banks becoming involved without clear open reporting the after hour trading and hiden deals are the normal these days and not the exception to the rules. Those who run the money games always win and the small time players lose. It has been that way even before the great depression. And its not ABOUT TO CHANGE UNTIL the leadership of this country no longer has their hands in the pockets of the banking WALL STREET elite. There are no poor politicians because of the special interests of the rich elitists on WALL STREET and the banking execs. This is not new news just old stuff in a different package to make it look like it needs to be studied some more while millions of hard working AMERICANS shovel trillions of hard earned dollars into an immoral, unethical, and illegial money stealing scheme. Berney eat your heart out! This how its ready done. The good old fashion Wall Street way. Buy the people who make the laws and give them a piece of the pie behind closed doors. THEN SET UP A SMOKE SCREEN WHEN THE PUBLIC CATCHES WIND OF IT.

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