Rate Fixing Scandal: Japan Cracks Down on TIBOR Manipulation

Japan has been quietly pioneering the mission to crack down on banks that have been falsifying interbank lending rate submissions over the last two years and is now looking to tighten controls further.

The Japanese Bankers' Association (JBA) revealed that is considering a review of as many as 16 banks to make sure they're following the lobbying group's guidelines for submitting honest and accurate submissions for yen-denominated Tokyo interbank offered rates (Tibor).

Hisanao Aoki, a spokesman for the association, confirmed that all reference banks may be reviewed for how they submit rates in the "offshore" market for Tibor rates, known as euro-yen Tibor. Meanwhile, Japanese lawmaker and former Morgan Stanley banker Tsutomu Okubo is said to be heading a panel examining these firms and will call on the JBA to explain how Tibor is set.

The move to tighten controls over submissions follows closely after Barclays settled with US and UK regulators for a record £290m fine for rigging its London Interbank Offering Rate (Libor) submissions.

While the news about Barclays has sent the Western financial world into a tailspin as regulators confirmed many other banks are still under investigation, Japanese regulators have already suspended some bank's operations, such as Citigroup and UBS, after the Securities and Exchange Surveillance Commission (SESC) found that some staff attempted to manipulate Tibor rates.

SESC Cracks Down on Banks

On 9 December 2011, the SESC issued a recommendation to Japan's Prime Minister and the Commissioner of the FSA to take "administrative action and any other appropriate measures against Citigroup and UBS" due to its investigation finding that a number of employees at both banks were attempting to manipulate Tibor rates.

"The SESC, through its inspection, verified the accuracy and sufficiency of the content of the report, and revealed that the report lacked a description of important matters regarding inappropriate approaches against submitting rates and contained an untruthful description, the conclusion of the report was derived from this untruthful description, and therefore the contents of the report were inappropriate," said the statement in relation to Citigroup.

The SESC also found that the Head of the G10 Rates at Citigroup, calling them 'Director A' had "continuously conducted approaches such as requesting a person in charge of submitting the TIBOR rates of Citibank Japan Ltd. (hereinafter referred to as "Submitting Personnel") to change its rates since around April 2010 at the latest."

It also found collusion between various traders and directors to falsify rates submissions and had "continuously conducted approaches such as requesting persons in charge of submitting the TIBOR rates of other banks, since Trader B joined [Citi] in December 2009, for the purpose of fluctuating TIBOR so as to give advantages to the Derivatives Transactions related to yen rates which Director A and Trader B were conducting."

At UBS, the SESC found that a yen-rates trader at the Rates Department of the Fixed Income, Currencies and Commodities Division in UBS, which is referred to as 'Trader A', had "continuously conducted approaches such as requesting a person in charge of submitting the TIBOR rates of UBS AG, Tokyo Branch to change its rates since around March 2007 at the latest, and also had continuously conducted approaches such as requesting persons in charge of submitting the TIBOR rates of other banks since around February 2007 at the latest, for the purpose of fluctuating TIBOR so as to give advantages to the Derivative Transactions related to yen rates which Trader A was conducting."

The SESC slammed Trader A for being "seriously unjust and malicious, and could undermine the fairness of the markets, considering that three-month TIBOR is the underlying asset of Three-month Euroyen Futures listed on Tokyo Financial Exchange."

Interestingly, UBS, which has had a questionable track record on risk management systems and controls record, "is also acknowledged to have a serious problem, since the approaches have been overlooked for long periods and no appropriate measures have been taken," said the SESC.

Changes to Tibor Calculation on the Cards?

In Japan, reference banks, including Mitsubishi UFJ Financial, JPMorgan and Deutsche Bank, submit their interbank offered rates in a similar self-reporting and operating fashion to how Libor is set.

However, JBA calculates the Tibor benchmark rate, while the British Banker's Association (BBA) compiles the data and passes it onto Thomson Reuters, which is the designated calculation agent for BBA LIBOR.

Data submitted by panel banks into the BBA Libor process is received and processed by Thomson Reuters and the data is calculated using guidelines provided by the FX&MM Committee.

According to the JBA website, the reference banks submit their Tibor rates to the JBA, which in turn compiles them and sets a benchmark. The JBA Tibor is calculated by the JBA as a prevailing market rate based on quotes for 13 different maturities (1 week and from 1 month to 12 months) provided by reference banks as of 11am each business day.

Much like BBA Libor calculations, the JBA excludes the top two and the bottom two reference rates for each maturity and takes the average of the remaining rates.

Over the past year, Japanese regulator SESC has cracked down on banks that have been seen to manipulate or attempt to rig the Tibor rate.

Katsunori Nagayasu, the former JBA chairman said in February this year that the group may take measures to improve the way the JBA compiles Tibor, much like the BBA, following the Financial Services Agency's (FSA) penalties for Citigroup and UBS.

Newly appointed JBA president Yasuhiro Sato but is also the president of Mizuho Financial Group is tipped to reveal more details on this when he speaks at a scheduled monthly press conference on 19 July.

Barclays and Libor Fixing Scandal Continues

While Barclays' raft of senior ex-employees, officials at the Bank of England (BoE) and the Financial Services Authority (FSA) have answered to UK MPs at various Treasury Select Committee (TSC) hearings over the last few weeks, regulators say that several other banks are still under investigation, across several jurisdictions.

At a recent TSC hearing, BoE governor Sir Mervyn King confirmed that Libor rates can be manipulated through collusion while on 17 July, US Federal Reserve chairman Ben Bernanke added "the Libor system is structurally flawed. It is a major problem for our financial system and for the confidence in the financial system. We need to address it."

The UK's FSA confirmed that while Barclays had settled for wrongdoings over the submission of Libor rates, seven lenders are being currently investigated over attempts to manipulate Libor. It also added that while UK and US regulators settled with Barclays, the bank is still under investigation across other jurisdictions.

RBS, Lloyds and Deutsche Bank are among some of the other lenders under investigation from other European, Asia and US regulators.

Barclays' ex-CEO Bob Diamond revealed at a recent hearing that Barclays has $300m set aside just for litigation costs.

While the Barclays case has highlighted how the way Libor is set needs to either change or be monitored and calculated in a different way, the regulators themselves have come under fire.

Despite, news on the Barclays settlement only being released last month, there is a raft of evidence, communication and reports on questionable Libor setting activities over the last few years.

MPs, such as the Labour Party's George Mudie slammed the UK's Financial Services Authority chairman Adair Turner for not opening a probe into Barclays or other banks earlier.

"This was under-regulated," said Mudie a TSC hearing. "You were warned about it and warned about it."