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Markets Regulation
Banks face lawsuit over Isdafix claims
From the Financial Times of Fri, 05 Sep 2014 12:45:45 GMT
epa03413882 People walk past a Bank of America branch in New York City, New York, USA, 28 September 2012. Bank of America agreed to pay 2.43 billion US dollars to settle claims that it misled investors in its 2009 acquisition of Merrill Lynch & Co. EPA/ANDREW GOMBERT©EPA

More than a dozen global financial institutions face fresh allegations that they colluded to manipulate a benchmark interest rate, in the first class-action lawsuit based on claims of rigging the Isdafix rate used for derivative contracts.

A US civil lawsuit is seeking damages from 13 banks and interdealer broker ICAP, and alleging that these institutions colluded to fix the Isdafix rate at “artificial levels” that allowed them to avoid paying the claimants what they were owed on interest rate derivative trades.

The lawsuit, filed by the small Alaska Electrical Pension Fund, includes an analysis of trading patterns and submissions to the benchmark showing what it claims are consistent anomalies in the years between 2009 and 2012.

The allegations open up yet another litigation front for global investment banks, which are already facing up to a string of damages claims over allegations of the rigging of Libor interbank lending rates as well as currency and gold markets.

Investors are seeking to recoup alleged losses in the tailwind of global regulatory probes into suspected collusion and manipulation of these benchmark rates.

The Isdafix rate-setting process has been under investigation by the US Commodity Futures Trading Commission for a year, but no charges have been brought against any companies or individuals. The UK’s Financial Conduct Authority and Germany’s BaFin have also been investigating.

The rate is based on submissions by leading banks that provide the average prices at which firms would buy and sell benchmark interest rate swaps – a $461tn market where investors agree to exchange a fixed rate for a floating rate.

Interdealer broker ICAP, which is among the firms being investigated by the CFTC, used to set the key Isdafix dollar rates by taking an average reference rate and then having the banks either validate the rate or submit their own rate. ICAP was stripped of its role managing the dollar rate early this year.

Based on research compiled by Fideres, the lawsuit alleges that from 2009 to 2012 the defendant banks submitted the same or virtually the same dollar Isdafix rate quotes almost every day, down to five decimal points, resulting in the official Isdafix rate and the banks’ contributions being identical to the ICAP reference rate well over 90 per cent of the time for at least four years.

The submissions began to “disperse” after news broke in December 2012 that Swiss bank UBS had struck a settlement over the alleged rigging of Libor interbank lending rates.

The plaintiff’s analysis also shows what the lawsuit claims are “highly anomalous, statistically significant” upward or downward price spikes in daily trading just before the benchmark was set, consistent with high-volume trading to move prices – a practice called “banging the close”.

The analysis has found a 70 per cent reduction in those anomalous movements around the fixing window after December 2012.

The defendants listed in the claim, which was filed in the New York Southern District Court, are Bank of America, Barclays, BNP Paribas, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, ICAP, JPMorgan Chase, Nomura Holdings, Royal Bank of Scotland, UBS and Wells Fargo.

All of the banks either declined to comment or did not immediately respond to requests for comment.

ICAP said: “We have not been served the complaint and are not prepared to comment at this time.”

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