Rate rigging scandals continue to haunt global financial entities with 16 banks including JPMorgan Chase & Co. JPM, Morgan Stanley MS and Citigroup Inc. C being sued for manipulating a key Australian interest rate benchmark. Two international brokerage firms – Tullett Prebon and ICAP Plc – have also been sued.
A class action lawsuit, filed in the U.S. District Court for the Southern District of New York, has been brought by Sonterra Capital Master Fund, FrontPoint Asian Event Driven Fund and Florida-based derivatives trader Richard Dennis.
Rate Rigging Led to Undue Profits for Banks
The lawsuit accuses the banks of rigging the Bank Bill Swap (“BBSW”) rate, the Australian equivalent of LIBOR, which is used to price billions of dollars worth of floating-rate bonds and syndicated loans.
Further, it refers to the details from the civil actions launched by the Australian regulator, the Australian Securities & Investments Commission (“ASIC”) against three local banks – Australia & New Zealand Banking Group Ltd. AZNBY, National Australia Bank Ltd. NABZY and Westpac Banking Corp. WBK. Notably, these banks are also defendants in the case.
Banks are accused of rigging BBSW by “artificially increasing or decreasing the supply of prime bank bills” during the time when it is being set. Also, they allegedly shares information on their BBSW rate exposure and coordinated in “manipulative trades to maximise their impact on BBSW rates”.
Further, plaintiffs accused the two brokerage firms of actively being the part of “the conspiracy by facilitating manipulative trading for the bank defendants.”
Other defendants include Deutsche Bank AG DB, HSBC Holdings plc HSBC, Lloyds Banking Group plc LYG, The Royal Bank of Scotland Group plc RBS, UBS Group AG UBS, Credit Suisse Group AG CS, Royal Bank of Canada RY, BNP Paribas SA BNPQY and Macquarie Group Ltd.
Per the complaint filed, “Defendants generated hundreds of millions of dollars in illicit profits by artificially fixing BBSW-based derivatives prices at levels that benefited their trading books.” Further it stated “Defendants’ ultimate goal was to increase the profitability of their BBSW-based derivatives positions.”
The lawsuit seeks a court order to force banks to “disgorge their ill-gotten gains.”
Banks’ Response to the Case
While Westpac, ANZ Bank and Lloyds Banking in separate statements said that they would “vigorously” defend themselves against the U.S. complaint, National Australia restated that it did not agree with claims made by the ASIC. Further, spokespersons for several other defendants refused to comment on the issue.
We believe business malpractices by banks will remain a concern in the near term. This is expected to hurt banks’ profitability and also lead to a rise in legal costs.
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