Wall Street banks face probe
ICAP brokers and as many as 15 Wall Street banks are being probed by the US’s Commodity Futures Trading Commission for possible manipulation of interest-rate swap prices.
ICAP brokers and as many as 15 Wall Street banks are being probed by the US’s Commodity Futures Trading Commission (CFTC) for possible manipulation of interest-rate swap prices used as a benchmark in the $379-trillion market.
The commission has issued subpoenas to about a dozen current and former employees at the company’s Jersey City, New Jersey, swapsbrokering group, nicknamed “Treasure Island” because of the size of the commissions it earns, said three people familiar with the investigation.
Dealers including Goldman Sachs Group and Deutsche Bank that contribute prices used to set the daily swap rates have also been subpoenaed, two people familiar with the matter said.
The ISDAfix prices and intraday trading levels that ICAP displays on an electronic screen known as 19901 are used by everyone from corporate treasurers to money managers to gauge wholesale funding costs.
The US Federal Reserve includes the rates in a daily report on money markets, and they are used to set daily values for much of the global rate-swaps market.
“That screen is critical,” said David Kelly, director of financial engineering at Calypso Technology in New York, who helped design the underlying analytics of the 19901 screen in the early 2000s. “That screen makes or breaks a lot of profit and loss, so clearly there’s a lot of opportunity for influence.”
The commission is investigating whether ICAP brokers colluded with dealers who stand to profit from inaccurate quotes, including failing to update published prices after trades occur, one of the people said. The US regulator is probing the swaps trading as it works with European counterparts in the raterigging scandal surrounding the London interbank offered rate (Libor). The company’s brokers in London have passed on requests from dealers asking rate-setters at rival banks to make favourable submissions, e-mails released as part of the European probe show. UBS, Royal Bank of Scotland Group and Barclays have paid $2.6bn in fines for rigging Libor rates.
CFTC spokeswoman Stephanie Allen said the commission does not comment on enforcement issues.
ICAP said it maintains policies prohibiting the alleged behaviour and is co-operating with the commission’s wider inquiry. The stock fell 3% to 283.8p in London.
ICAP, the biggest broker of interest-rate swaps between banks, is paid commissions based on the size of the trades it matches.
On average, $1.4-trillion of transactions were traded daily on the company’s systems last year, it said in its annual report.
Like Libor, which is the rate at which banks say they would lend to each other, ISDAfix is derived from a process where 15 banks submit bids and offers for swaps in various currencies and denominations, according to the website of the International Swaps and Derivatives Association (ISDA), which created the rate in 1998 with the predecessors of Thomson Reuters and ICAP.
The rates are distributed by Thomson Reuters, Talkers and Bloomberg LP, the parent company of Bloomberg News.
The contributors to ISDAfix are Bank of America, Barclays, BNP Paribas, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC Holdings, JPMorgan Chase, Mizuho Financial Group, Morgan Stanley, Nomura Holdings, Royal Bank of Scotland, UBS and Wells Fargo, ISDA said.
Representatives at the banks declined to comment.
Rate swaps, which investors and companies use to exchange fixedand floating-rate obligations, involve a series of payments that are determined by rising or falling interest costs over the lifetime of the contract. They last as long as 30 years and are denominated in notional amounts that are used to calculate payments and do not represent money that has changed hands.
One potential source of price manipulation being probed by the commission is tied to ICAP brokers not updating the rate-swap price on the 19901 screen after they facilitate a trade between two banks, according to one of the people, and a former ICAP broker in the Jersey City rateswaps group.
The brokerage enters those prices manually onto the screen, and dealers tell the brokers not to put trades into the system until all their business in a transaction is done, which skews current market prices, according to the former broker, who said he witnessed such activity.
During his time working on 19901, Mr Kelly said he witnessed dealers’ press brokers to move the screen price after a trade, though no broker ever did. “There can be disagreements about the timing of the movement of the screen, which can be misconstrued as manipulation,” he said. Dealers “threatened to pull their business, they threatened to do whatever. The broker’s in a tough spot, do they delay by a few seconds? They make it very hard on the brokers.”
About 6,000 companies and financial firms subscribe to the prices published on the 19901 screen, according to ICAP. Those values are accepted as a legal settlement price by which swaps traders can terminate contracts, or to mark the value of positions, according to ISDA. Corporations also use 19901 to see where current rate swaps are trading relative to government benchmarks, and then add in their cost of borrowing based on their credit rating to see where they would be able to issue bonds, Mr Kelly said.
Elsewhere in credit markets, Carrefour Banque, the financial arm of the French retail chain, marketed ¤300m of floating-rate notes in its first public debt issue since January. Softbank plans to sell bonds worth $2bn in the US and Europe to help fund its acquisition of Sprint Nextel. Carrefour Banque marketed the three-year FRNs at a yield about 90 basis points more than the threemonth euro interbank offered rate, or Euribor, according to a person with knowledge of the transaction.
BNP Paribas, Credit Agricole, HSBC, Natixis and Societe Generale are managing the deal, which was due to be completed yesterday, said the person.
The cost of protecting corporate debt from default fell for a third day in Europe. The Markit iTraxx Europe index of credit-default swaps tied to 125 companies with investment-grade ratings fell two basis points to 114, the lowest since March 18, according to prices.
Debt risk declined for a third day yesterday in the US, with the Markit CDX North American Investment Grade index falling 2.4 basis points to a mid-price of 85.7. The gauge, which investors use to hedge against losses or to speculate on creditworthiness, has dropped from 92.5 on March 27, the highest level this year, prices show.
Credit-default swaps typically fall as investor confidence improves and rise as it deteriorates. Contracts pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 a year on a swap protecting $10m of debt.
The US two-year interest-rate swap spread, a measure of debt market stress, rose for a second day, increasing 0.26 basis point to 15.24 basis points. The measure widens when investors seek the perceived safety of government securities and narrows when they favour assets such as corporate bonds.
Softbank, which is buying the stake in Sprint for about $20bn, may sell seven-year notes denominated in dollars and euros later this month, according to a person familiar with the transaction.
The wireless carrier run by billionaire Masayoshi Son offered in October to buy a 70% stake in Sprint Nextel to enter the US market and create the world’s third-biggest cellphone services provider. The Tokyo-based firm was the first to offer Apple’s iPhone in Japan. Proceeds will be used to fund the Sprint deal, refinance debt and for general corporate purposes, said the source. The sale is not contingent on the closing of the Sprint acquisition.
The Standard & Poor’s-LSTA US Leveraged Loan 100 index declined for a second day, decreasing 0.01c to 98.31c on the dollar. The measure, which tracks the 100 largest dollardenominated first-lien leveraged loans, has dropped from 98.35 on April 4, the highest level since July 2007. Leveraged loans and highyield bonds are rated below Baa3 by Moody’s and lower than BBB- at Standard & Poor’s
In emerging markets, relative yields declined for a third day, narrowing six basis points to 291 basis points, or 2.91 percentage points, according to JPMorgan’s EMBI global index. The measure has averaged 317 basis points in the past year. Bloomberg