Record of Trader Talk to Haunt RBS

By Kara Scannell and Brooke Masters
Financial Times, London

 A senior yen trader at Royal Bank of Scotland made a revealing observation in mid-2007 about the bank panel that sets the borrowing rate in Japanese yen.

“The jpy libor is a cartel now. It’s just amazing how libor fixing can make you that much money,” the senior trader wrote in an instant message to traders at two other banks, according to a filing by the US Commodity Futures Trading Commission.

On Wednesday RBS admitted to manipulating the London Interbank Offered Rate in yen and Swiss francs between 2006 to 2010 and agreed to pay L390 million to the CFTC, US Department of Justice, and the UK’s Financial Services Authority. Its Japan subsidiary pleaded guilty to wire fraud.

According to the FSA, 21 RBS employees, including one manager, were involved in the “misconduct,” which included at least 96 written requests from traders to submitters, 131 “indirect” requests to move the rates made through other traders, and 30 instances where traders acting as substitute submitters took requests from their colleagues.

The vast majority of rate requests involved rates for Japanese yen or Swiss francs, although regulators also documented five, apparently unsuccessful, efforts to influence the US dollar rates. RBS settled allegations it manipulated other rates, but the identity was redacted from the public filings, citing an ongoing investigation.

The attempts at manipulation within RBS were so casual that one trader joked that he moved his fixes day to day as much as a prostitute draws up and down her underwear, while a broker at another firm offered a RBS rate submitter a steak dinner in exchange for a favourable fix, according to the CFTC order.

Just as a senior yen trader’s words would come back to haunt RBS, so would two strategic decisions the bank made in 2006: RBS combined its London-based money markets desk, which included the Libor submitters and their derivatives traders, and hired two superstar yen derivatives traders to buoy its presence.

“Increased communication  . . .  was one of the primary objectives” for rolling the London desks together, according to the FSA’s final notice. Known as short-term markets or STM, the submitters and traders sat elbow to elbow and were encouraged to share information. Authorities allege market colour turned to attempts at manipulation and soon traders began to fill in as substitute submitters, when the main people were on vacation or otherwise unavailable. Moving the rate benefited the trader’s position and ultimate compensation, authorities alleged.

Before the STM desk was physically separated in late 2008, there were relatively few written exchanges, but they included one conversation in which a trader asked for a low submission on Swiss francs. “What’s it worth?” the submitter asked. “I’ve got some sushi rolls from yesterday,” the trader responded.

After the separation, the electronic conversations became more frequent. However, the nature did not change. “Libors as requested,” a submitter wrote in 2009. “You a top dog.” The messages and emails laid an evidence trail that authorities would eventually follow.

It was also in 2006 when RBS’s recruitment of two yen traders — who were given control of round-the-clock yen trading from Asia to London to Connecticut — appeared to be paying off. Revenues went from a small loss in 2006 to $200 million in 2010.

By January 2007, one RBS yen trader became suspicious that a trader at UBS was working with interdealer brokers who acted as middle men to manipulate the rates, according to messages cited by the CFTC.

It wasn’t long before RBS traders allegedly colluded with the UBS yen trader identified as Tom Hayes. In December US prosecutors charged Mr. Hayes with criminal fraud. His lawyer declined to comment.

Traders’ requests were frequent and often changed direction. In September 2009 a RBS submitter moved the submission high one day for a yen trader and then lower the next day. “… Make your mind up haha,” the submitter said.

“I’m like a whore’s drawers,” the yen trader replied.

The regulatory documents also outline the passive response of RBS’s compliance and internal audit functions.

The bank failed to detect at least 30 wash trades — matching buy and sell trades placed with the same counterparty for the same amount on the same day — intended to steer L211,000 in brokerage commissions to employees at two different interdealer brokers, the FSA said.

RBS had no rules governing the input of derivatives traders in Libor submissions until June 2011, 14 months after they had launched an internal investigation into the area at FSA prompting. A senior manager assured the watchdog in March 2011 that the bank “has in place adequate systems and controls for the determination and submissions of its Libor rates,” the FSA said.

The bank did not write rules preventing money markets traders from considering their trading books when making Libor submissions until March 2012.

Although the British Bankers Association asked panel banks to examine their Libor submission processes after questions were raised in the media about the rates in 2008, RBS failed to return the required paperwork and did not do an audit until February 2011. The manager who directly supervised the derivatives traders told the FSA he was not aware that his traders were serving as substitute submitters.

According to the CFTC, traders began to try to avoid scrutiny. The senior yen trader in November 2010 sent a written request to RBS’s primary submitter, who promptly refused it.

Within moments the submitter telephoned the yen trader, who said, “We’re not allowed to have conversations” on instant messages. He agreed to move the rate, according a transcript of a recorded phone line cited in the CFTC order.

RBS ended up paying a higher fine for Libor manipulation than Barclays because of the wash trades, the longer period of misconduct, and because it failed to clamp down on rate-rigging even after the FSA began investigat