The Financial Conduct Authority (FCA) has fined Martin Brokers (UK) Ltd (Martins) £630,000 for misconduct relating to the London Interbank Offered Rate (LIBOR). Martins would have been fined £3,600,000 but for the fact that the firm was able to show that it could not pay a penalty of this amount in addition to the other regulatory fines that Martins faces in relation to LIBOR.
Martins is the second inter-dealer broker and the sixth firm overall, to be fined by the FCA for LIBOR-related failures.
Tracey McDermott, director of enforcement and financial crime, said:
“Interdealer brokers are expected to act as trusted intermediaries and are key conduits of market information. Martins abused this position of trust by providing false information to Panel Banks, with no regard for the integrity of the market. This is unacceptable behaviour from any market participant.”
“The culture at Martins was that profit came first. Compliance was seen as a hindrance and the firm lacked the means to detect the “wash trades”. In this environment, broker misconduct was almost inevitable. Similar cultural failings at other firms have caused havoc in the financial services industry. As we have said before, firms need to take their responsibilities to uphold market integrity seriously. If firms fail to heed these warnings then we will take action against them.”
Between January 2007 and December 2010, Martins colluded with a trader at UBS to manipulate the (Japanese Yen) JPY LIBOR rates for his benefit. The misconduct involved Martins deliberately disseminating incorrect or misleading LIBOR submission levels by:
- communicating skewed suggestions to some Panel Banks as to where they believed the published JPY LIBOR rate would set for a particular day (known as "run-throughs");
- creating false (or “spoof”) orders, with the aim of influencing Panel Banks’ views of the cash market so that they would make JPY LIBOR submissions at levels that benefitted the UBS trader; and
- requesting certain Panel Banks to make specific JPY LIBOR submissions.
The UBS trader made corrupt brokerage payments to reward Martins for their efforts to manipulate the LIBOR submissions of panel banks through the use of fake trades known as “wash trades”.
Martins’ misconduct involved several brokers and occurred over a number of years. Two brokers (including one manager) were central to the collusion, although at least three other individuals (including two managers) spanning two desks played a role.
Martins’ risk management systems and controls were inadequate to monitor and oversee its broking activity. There was no effective oversight of the brokers involved, which meant that they were able to freely engage in misconduct.
The brokers’ misconduct was exacerbated by a poor compliance culture within Martins which was a result of its heavy focus on revenue at the expense of regulatory requirements.
Martins’ inadequate systems, controls, supervision and monitoring meant that the brokers’ misconduct continued for several years. For similar reasons, the “wash trades” which were exceptionally large, were not identified as suspicious.
Martins agreed to settle at an early stage of the investigation and therefore qualified for a 30% discount under the FCA’s settlement discount scheme. Without the discount, the fine would have been £900,000.
This was a significant cross-border investigation and, in particular, the FCA would like to thank the US Commodity Futures Trading Commission (CFTC) for their cooperation. Martins also agreed to settle an action brought by the CFTC, who imposed a financial penalty of $1.2 million.
Notes for editors
- The Final Notice for Martins[1]
- Martins is the second inter-dealer broker firm to be fined for LIBOR misconduct. Martins offers broking services for a wide range of financial products, including interest rates, foreign exchange and derivatives. Given this role, Martins’ brokers have particular market insight into cash trading prices and expected LIBOR rates and are able to provide their clients (including Panel Banks) with suggestions as to where they believe LIBOR will set on particular dates.
- With this settlement, the FCA has now imposed penalties of £426.63 million on entities for manipulative conduct with respect to LIBOR submissions. On 27 June 2012, the FCA fined Barclays Bank plc £59.5 million for misconduct relating to LIBOR and EURIBOR. On 19 December 2012, the Financial Services Authority (FSA), the FCA’s predecessor, fined UBS AG £160 million for significant failings in relation to LIBOR and EURIBOR, and on 6 February 2013, the FSA fined The Royal Bank of Scotland plc £87.5 million for misconduct relating to LIBOR. On September 2013, the FCA fined ICAP Europe Limited £14 million. On 29 October 2013, the FCA fined Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A. £105 million.
- On 2 July 2012, the Chancellor of the Exchequer commissioned Martin Wheatley, chief executive of the FCA (formerly managing director of the FSA), to undertake a review of the structure and governance of LIBOR and the corresponding criminal sanctions regime. On 28 September 2012, the Wheatley Review published its final report ‘The Wheatley Review of LIBOR’[2] which included a 10-point plan for comprehensive reform of LIBOR. On October 2012, the Government accepted the Review’s recommendations in full, and enacted the Financial Services Act 2012. This Act, which amended the Financial Services and Markets Act 2000 came into force on 1 April 2013. On 25 March 2013, the FSA published its Policy Statement (PS13/6)[3] setting out the new rules and regulations for financial benchmarks, following on from the recommendations of the Wheatley Review and the new provisions of the Financial Services Act 2012. These rules came into force on 2 April 2013.
- The LIBOR benchmark reference rate indicates the interest rate that banks charge when lending to each other. It is fundamental to the operation of both UK and international financial markets, including markets in interest rate derivatives contracts.
- LIBOR is used to determine payments made under both over the counter (OTC) interest rate derivatives contracts and exchange traded interest rate contracts by a wide range of counterparties including small businesses, large financial institutions and public authorities. Benchmark reference rates such as LIBOR also affect payments made under a wide range of other contracts including loans and mortgages. The integrity of benchmark reference rates such as LIBOR is therefore of fundamental importance to both UK and international financial markets.
- LIBOR is by far the most prevalent benchmark reference rates used in euro, US dollar and sterling OTC interest rate derivatives contracts and exchange traded interest rate contracts. The notional amount outstanding of OTC interest rate derivatives contracts at end-2012 totalled USD $490 trillion.
- LIBOR was, at the relevant time, published on behalf of the British Bankers’ Association (BBA). Responsibility for the administration of LIBOR passed from the BBA to the Intercontinental Exchange Benchmark Ltd on 31 January 2014. There are different panels of banks that contribute submissions for each currency in which LIBOR is published. Throughout the Relevant Period between 7 and 16 banks contributed to the different LIBOR currency panels. Every LIBOR rate was calculated using a trimmed arithmetic mean. Submissions for each currency and maturity made by the banks were ranked in numerical order and the highest 25% and lowest 25% were excluded. The remaining contributions were then arithmetically averaged to create the final published LIBOR rate.
- On 1 April 2013 the FCA became responsible for the conduct supervision of all regulated financial firms and the prudential supervision of those not supervised by the Prudential Regulation Authority (PRA).
- The FCA has an overarching strategic objective of ensuring the relevant markets function well. To support this it has three operational objectives: to secure an appropriate degree of protection for consumers; to protect and enhance the integrity of the UK financial system; and to promote effective competition in the interests of consumers.
- Find out more information about the FCA.