Bloomberg News

UBS Faces Probe for Possible Misconduct on Hong Kong Rate

December 20, 2012

UBS Investigated for Potential Misconduct on Hong Kong Rates

The penalties of $1.5 billion that UBS, Switzerland’s biggest bank, must pay to U.S., U.K. and Swiss regulators for trying to rig rates represent about one-third of the bank’s 2011 net income. Photographer: Jason Alden/Bloomberg

UBS AG, which will pay $1.5 billion to settle charges with U.S. and U.K. regulators for manipulating Libor, is under scrutiny in Hong Kong for possible misconduct linked to the benchmark rate set in the city.

The Hong Kong Monetary Authority has started an investigation to see if there was wrongdoing by the Swiss bank in its submission of data for setting the Hong Kong Interbank Offered Rate, according to a statement from the de-facto central bank today. The HKMA is also reviewing whether the potential misconduct may have had a material impact on the rate.

Overseas regulators alerted the HKMA about potential manipulation of the local interbank lending rates and other reference rates in the region, it said. The move signals that the world’s biggest banks, some of which have already been penalized in Japan, may now be probed in more Asian nations even as they seek to placate U.S. and U.K. authorities.

“The whole episode is a wake-up call to regulators globally that markets are moving faster than regulators,” Sandy Mehta, chief executive officer of Value Investment Principals Ltd. in Hong Kong, said today. “While we do not need more rules and regulations, large firms in particular need to tighten their internal controls.”

For years, traders at Royal Bank of Scotland Group Plc (RBS), Barclays (BARC) Plc, UBS, Deutsche Bank AG (DBK), Rabobank Groep and other firms worked with employees responsible for setting the London interbank offered rate to rig the price of money, according to documents obtained by Bloomberg and interviews with two dozen current and former traders, lawyers and regulators.

Employee Misconduct

Preliminary information provided by an overseas regulator indicates potential misconduct by staff rather than a problem with the bank’s systems, HKMA Deputy Chief Executive Arthur Yuen said at a news conference in Hong Kong today.

The investigation is focusing on UBS, Yuen said. It may expand to include other banks, and the HKMA can’t estimate when it will end, he said, without naming the other possible targets. The Swiss lender contributed to setting the Hong Kong interbank rate in 2002-2010, according to Yuen.

Libor is the global benchmark for more than $300 trillion of contracts, from mortgages and student loans to interest-rate swaps. The attempts to manipulate the rate -- which are at the heart of the biggest and longest-running scandal in banking history -- flourished for years, even after bank supervisors were made aware of the system’s flaws.

Libor Fines

The penalties of $1.5 billion that UBS, Switzerland’s biggest bank, must pay to U.S., U.K. and Swiss regulators for trying to rig rates represent about one-third of the bank’s 2011 net income. The amount, announced yesterday, is triple the penalties against London-based Barclays.

“We continue to work closely with various regulatory authorities to resolve issues relating to the setting of certain global benchmark interest rates,” Mark Panday, a Hong Kong- based spokesman at UBS, said in an e-mailed statement today following the HKMA’s statement. “As we are currently in active discussions with these authorities, we cannot comment further.”

Two former traders at Zurich-based UBS, Tom Alexander William Hayes and Roger Darin, were charged with conspiracy in a criminal complaint unsealed yesterday, the U.S. Justice Department has said. Hayes also was charged with wire fraud and a price-fixing violation for manipulating the London Interbank Offered Rate at another bank, the department said.

Fired Traders

Those charges are the first brought by U.S. officials against individuals alleged to have manipulated Libor and comparable benchmarks in Europe and Japan. The U.S. Commodity Futures Trading Commission’s $700 million fine is the largest in the agency’s history, David Meister, the commission’s head of enforcement, said at the news conference.

Barclays in June agreed to pay 290 million pounds ($472 million) for submitting false London and euro interbank offered rates. The scandal led to the departure of CEO Robert Diamond, Chairman Marcus Agius and Chief Operating Officer Jerry Del Missier from Britain’s second-largest bank.

RBS has fired four traders and suspended at least three others for alleged rate manipulation, according to a person with knowledge of the probe. Barclays has disciplined 13 employees and dismissed five, Rich Ricci, now head of corporate and investment banking, told U.K. lawmakers on Nov. 28. More than 25 people have left UBS (UBSN) after that lender’s internal probe, a person with knowledge of the investigation said last month.

Japan’s Financial Services Agency this month joined a probe into possible rigging of interest rates at Edinburgh-based RBS, two regulatory officials with knowledge of the matter said. It began scrutinizing the lender’s local banking and brokerage units on issues including compliance related to the setting of Libor and Tibor, or the Tokyo interbank offered rate, the people said, asking not to be named as the matter is confidential.

A year ago, Citigroup Inc. (C:US)’s local securities unit and UBS were ordered by Japan’s FSA to suspend some derivatives transactions after staff of the firms attempted to influence interbank lending rates. The U.S. lender’s local securities unit was banned from trading tied to Libor and Tibor for two weeks in January, while UBS received a one-week suspension.

To contact the reporter on this story: Stephanie Tong in Hong Kong at stong17@bloomberg.net

To contact the editor responsible for this story: Chitra Somayaji at csomayaji@bloomberg.net


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