Tuesday, March 5, 2013

UBS Libor cheats targeted Australia's bank bill rate

By Business editor Peter Ryan

It's been revealed that Australia was targeted in a strategy by the Swiss bank UBS to manipulate benchmark interest rates around the world.

The Australian angle is briefly mentioned in an internal investigation by UBS into the LIBOR rate fixing scandal which erupted in Britian last year.

While the corporate regulator ASIC is probing the attempted manipulation, financial market authorities are confident about the integrity Australia's benchmark rate mechanism.

The revelations are buried in a footnote on page 38 of a report by the US Commodity Futures Trading Commission which points to a culture of manipulation on a daily basis going back to 2005.

The Australian Securities & Investments Commission is known to have ramped up its inquiries with UBS since the the allegations moved from the British LIBOR scandal to those about Australia's bank bill swap rate or the BBSW.

But the Australian Financial Markets Association which represents market participants says the intregity of Australia's benchmark rate has not been compromised.

Read the full report here.

Executive director David Lynch told The World Today that Australia's BBSW operates differently from LIBOR:

DAVID LYNCH: In the Australian situation, it's quite different to LIBOR in the UK or LIBOR in Europe insofar as when you compare the actual outcomes from LIBOR and BBSW, you see the range of rates which might be contributed to LIBOR are quite broad, up to 40 basis points in terms of the range of rates that might be submitted, whereas in the case of BBSW, because of its structural design, the rates that are accepted for a calculation of the rate tend to be within one basis point of each other, in other words 100th of a percentage point of each other.

So the ability for a submitter to influence the rate inappropriately is very narrow in the context of BBSW, it's not material.

PETER RYAN: So while the LIBOR rate is based on a range of rates which tend to be theoretical, the bank bill swap rate here in Australia is much closer to a fixed rate.

DAVID LYNCH: Yes, I mean insofar as what banks and LIBOR are asked to provide submissions on are the rates which they individually could borrow in markets, so it's a matter of opinion because it's not an actually traded market.

Whereas in the Australian system, analysts are asked to provide their observations on where the market is trading, so in effect, each of the up to 14 panellists in BBSW should be providing the same rate.

PETER RYAN: But clearly this is an important development, given the whole LIBOR scandal coming out of Britain.

DAVID LYNCH: The LIBOR scandal and the nature of the issues there are quite different to the process here but the point we've always made is that all rate sets involve some element of risk. The question is how effectively you manage the risk in relation to that process.

Now in terms of submissions to BBSW, given the statistical characteristics of the rate and the structural design of the rate, it really is a very small scope for rates to be unduly influenced.

PETER RYAN: So you're saying that Australians can be very confident that the bank bill swap rate here in Australia is a true reflection of the market forces.

DAVID LYNCH: Yeah. What the BBSW rate is, it's a set of observations on where the market is trading, and in terms of submissions that we receive, they are sufficiently narrow in terms of variance to give a high level of confidence in relation to the accuracy of what's been observed.

Last year the British bank Barclays was caught manipulating the London Interbank Offered Rate - or the LIBOR - which indicates the rate for unsecured borrowing between banks.

A scandal erupted and Barclays was hit with more than 400 million dollars in fines.

Soon other banks started coming clean including the Swiss bank UBS - which settled with US, British and Swiss regulators for $1.5 billion.

Anything wondering if such bad banking behaviour was the tip of the iceberg had their cynicism confirmed by an internal investigation by UBS which reveals ofher markets around the world including Australia were targeted up by UBS bankers.

The World Today contacted UBS for more information but at the time of broadcast the ABC's calls had not been returned.

1 comment:

  1. Peter
    In the context of your article you might want to have a closer look at the current Australian Bank Bill rates which are unusually low compared with Term deposit interest rates being offered by banks. As the banks set the bank bill rates - those low set interest rates may have a lot to do with the bank issued interest rate securities which are geared to the bank bill rate. A conflict of interest?


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