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LIBOR rigging (view source)

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While banks try to balance their books so their portfolio of customer swaps offset each other as far as possible, how they “position” the book might help manage the bank’s ''structural'' interest rate risk.  
While banks try to balance their books so their portfolio of customer swaps offset each other as far as possible, how they “position” the book might help manage the bank’s ''structural'' interest rate risk.  


Under the “basic banking model”, a bank will always be “[[Axe|axed]]” for floating rates to be as low as possible. You would expect a basic bank’s submissions to reflect that. But a swap trader who is “long” floating rates will wish floating rates to go ''higher''.  
Under the “basic banking model”, a bank will always be “[[Axe|axed]]” for floating rates to be as low as possible. You would expect a basic bank’s LIBOR submissions to reflect that. But a swap trader who is “long” floating rates will wish floating rates to go ''higher''.  


This prospect, we venture, was not wildly present in the minds of the Sir Bufton Tuftons who formulated the LIBOR rules defining how submitting banks should choose the rates they submit each day.
This prospect, we venture, was not wildly present in the minds of the Sir Bufton Tuftons who formulated the LIBOR rules that defined how submitting banks should choose the rates they submit each day.


The question arose later, even though it did not arise then: when submitting a rate, what account, if any, may a bank take of its own derivatives trading book?   
The question arose later, even though it did not arise then: when submitting a rate, what account, if any, may a bank take of its own derivatives trading book?   
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On any day there will be a range of rates at which a bank ''could'' borrow. These might be firm offers from other lenders, good faith estimates or model outputs. There is an excellent [[subjunctive]] in there, by the way: “''were'' it to do so” implies that that a submitting bank need not ''actually'' do so.  
On any day there will be a range of rates at which a bank ''could'' borrow. These might be firm offers from other lenders, good faith estimates or model outputs. There is an excellent [[subjunctive]] in there, by the way: “''were'' it to do so” implies that that a submitting bank need not ''actually'' do so.  


Say the range of available rates a bank sees on a given day is between 2.50% and 2.53%. Which of these is “''the'' rate at which it could borrow funds”? You can only choose one. The logical options (setting aside for now their legality) are:  
Say the range of available rates a bank sees on a given day is between 2.50% and 2.53%. Which of these is “''the'' rate at which it could borrow funds”? You can only choose one.  
 
Setting aside for a moment compliance with the LIBOR Definition, the possible avenues open to a bank in submitting a rate are:  


''Pick an “available” rate'': Choose one of the rates from the range, as above.  
''Pick an “available” rate'': Choose one of the rates from the range, as above.  
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''Make one up'': Submit a rate that did not fall within the estimated range, whether lower or higher.
''Make one up'': Submit a rate that did not fall within the estimated range, whether lower or higher.


“Making one up” plainly falls outside the scope of the LIBOR Definition. “Making a blended rate” does not quite conform to the text, but perhaps captures its spirit.   
“Making one up” plainly falls outside the scope of the LIBOR Definition. “Making a blended rate” does not quite conform to its text, but perhaps captures its spirit.   


To an uncomplicated reading, “picking one of the available rates” seems to fall squarely inside the LIBOR Definition. This was a rate at which the bank ''could'' borrow funds.   
To an uncomplicated reading, “picking one of the available rates” seems to fall squarely ''within'' the LIBOR Definition. This was a rate at which the bank ''could'' borrow funds.   


This is what Hayes did. The complication is that he actively selected the available rate that best suited his or, in some cases, competitors’ derivative trading positions. That is, he was guided by his own commercial interests, and not the “structural” interests of a hypothetical basic bank.  
This is what Hayes did. The complication is that he actively selected the available rate that best suited his or, in some cases, competitors’ derivative trading positions. That is, he was guided by his own commercial interests, and not the “structural” interests of a hypothetical basic bank.  
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That, in turn, came down to whether Hayes “deliberately disregarded the “''proper basis''” for the submission of those rates”.
That, in turn, came down to whether Hayes “deliberately disregarded the “''proper basis''” for the submission of those rates”.


The first instance court did not really dwell what the LIBOR Definition meant — there’s not much of it — but rather whether Hayes’ intentions when choosing the rate he submitted were to reflect “the bank’s genuine perception of its borrowing rate”.  
The first instance court did not really dwell what the LIBOR Definition meant — there’s not much of it to dwell on — but rather asked whether Hayes’ intentions when choosing the rate he submitted reflected “the bank’s genuine perception of its borrowing rate”.  


The court framed its instructions to the jury as follows:
The court framed its instructions to the jury as follows:
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3. Did Mr Hayes appreciate that what he was doing was dishonest by those standards?
3. Did Mr Hayes appreciate that what he was doing was dishonest by those standards?
:If the answer is No, Mr Hayes is not guilty on that Count. If the answer is Yes, Mr Hayes is guilty on that Count.”}}
:If the answer is No, Mr Hayes is not guilty on that Count. If the answer is Yes, Mr Hayes is guilty on that Count.”}}


The jury answered, “yes” to all three questions and Hayes was sent to prison for 14 years.  
The jury answered, “yes” to all three questions and Hayes was sent to prison for 14 years.  


He was not the only one: total of thirty-seven traders were prosecuted in London and New York for interest rate benchmark manipulation. Of these, nineteen were convicted and nine imprisoned.
He was not the only one. In total, thirty-seven traders were prosecuted in London and New York for interest rate benchmark manipulation. Of these, nineteen were convicted and nine imprisoned.


====Meanwhile, in Gotham City====
====Meanwhile, in Gotham City====
{{Drop|T|he travails of}} other LIBOR submitters is interesting purely because of its scale — we’ll come to that — but also because two men convicted for manipulating LIBOR in the United States in similar circumstances successfully appealed. Their appeal focussed on the question of ''what the LIBOR Definition actually meant''.   
{{Drop|T|he travails of}} other LIBOR submitters is interesting purely because of its scale — we’ll come to that — but also because two men convicted for manipulating LIBOR in the United States in similar circumstances successfully appealed. Their appeal focused on ''what the LIBOR Definition actually meant''.   


In {{casenote|United States|Connolly and Black}}<ref>{{citer|United States|Connolly and Black|2d Cir. 2022|No. 19-3806|}}</ref> the United States Court of Appeals for the Second Circuit, considered the meaning of the LIBOR Definition to be a question of ''fact'': filtered through the prisms of grammar, usage, subject matter expert opinion and industry practice.
In {{casenote|United States|Connolly and Black}}<ref>{{citer|United States|Connolly and Black|2d Cir. 2022|No. 19-3806|}}</ref> the United States Court of Appeals for the Second Circuit found the meaning of the LIBOR Definition to be a question of ''fact'': filtered through the prisms of grammar, usage, subject matter expert opinion and industry practice.


The question of law — whether the submitters were dishonest<ref>The charge was wire fraud under {{Plainlink|https://www.law.cornell.edu/uscode/text/18/1343|18 U.S. Code § 1343}}:  in the JC’s nutshell, electronically communicating for the purpose of executing any scheme to defraud or obtain by false pretence. (''Double'' disclaimer: JC is neither a US lawyer nor a criminal lawyer, but it looks analogous to common law conspiracy to defraud.)</ref> — depended a great deal on matters of ''fact'' — such as what did those submitting rates believe the LIBOR Definition allowed, and if that seemed far-fetched, what a reasonable person would think it required. The US court took a literal reading of the LIBOR Definition:  
The question of law — whether the submitters were dishonest<ref>The charge was wire fraud under {{Plainlink|https://www.law.cornell.edu/uscode/text/18/1343|18 U.S. Code § 1343}}:  in the JC’s nutshell, electronically communicating for the purpose of executing any scheme to defraud or obtain by false pretence. (''Double'' disclaimer: JC is neither a US lawyer nor a criminal lawyer, but it looks analogous to common law conspiracy to defraud.)</ref> — depended a great deal on matters of ''fact'' — such as what did those submitting rates believe the LIBOR Definition allowed, and if that seemed far-fetched, what a reasonable person would think it required. The US court took a literal reading of the LIBOR Definition:  
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Another: how ''everyone'' behaved when interacting with the LIBOR Definition helps work out what a reasonable person would have understood it to mean. There can be no better indication of reasonableness than direct evidence of the behaviour of fellow [[Man on the Clapham Omnibus|passengers on the Clapham Omnibus]].
Another: how ''everyone'' behaved when interacting with the LIBOR Definition helps work out what a reasonable person would have understood it to mean. There can be no better indication of reasonableness than direct evidence of the behaviour of fellow [[Man on the Clapham Omnibus|passengers on the Clapham Omnibus]].


There is here the odd spectre of the law of [[contract]] forming the backdrop to a criminal allegation. This is rare. Usually, the criminal authorities stay well out of commercial disputes, even where allegations of fraud are flying around seeing them as a matter of civil loss between merchants perfectly able to look after themselves, and not requiring the machinery of the state.   
There is here the odd spectre of the law of [[contract]] forming the backdrop to a criminal allegation. This is rare. Usually, the criminal authorities stay well out of commercial disputes, even where allegations of fraud are flying around, seeing them as a matter of civil loss between merchants perfectly able to look after themselves, and not requiring the machinery of the state.   


[[LIBOR]], on which the bank deposits and mortgage repayments of unwitting retail punters depend, made things a bit different.  This is no private matter to be sorted out between gentlemen with revolvers.   
[[LIBOR]], on which the bank deposits and mortgage repayments of unwitting retail punters depend, made things a bit different.  This is no private matter to be sorted out between gentlemen with revolvers.   
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