Bloomberg News

ICAP Brokers on ‘Treasure Island’ Said to Reap ISDAfix Rewards

April 10, 2013

ICAP Brokers on ‘Treasure Island’ Said to Reap ISDAfix Rewards

London-based ICAP Plc, the biggest broker of interest-rate swaps between banks, is paid commissions based on the size of the trades it matches. Photographer: Chris Ratcliffe/Bloomberg

ICAP Plc’s (IAP) U.S. interest-rate swap desk, which regulators are investigating as part of a price- manipulation probe, paid its brokers as much as $7 million a year at the market’s peak, earning the group the nickname “Treasure Island,” said two people familiar with the matter.

The team of about 20 in the company’s Jersey City, New Jersey, office made $100 million to $120 million annually for ICAP around 2008 and 2009, said the people, who asked not to be named because the details are private. The group benefits from a move 11 years ago that put the firm in control of the computer screen used by the industry to price swaps in much of the $379 trillion market, one of the people said.

That screen has become the focus of the Commodity Futures Trading Commission, which subpoenaed about a dozen current and former ICAP brokers and as many as 15 dealers to determine if they’re colluding to create inaccurate quotes that would boost bank profits. About 6,000 firms subscribe to the screen, and prices set daily by the trades ICAP arranges are used by corporate treasurers and money managers to value positions.

“Brokers who can work in markets that aren’t transparent continue to enjoy oversized profitability,” Mark Williams, a former Federal Reserve bank examiner who teaches risk management at Boston University, said in a telephone interview.

Matching Dealers

London-based ICAP, the biggest broker of interest-rate swaps between banks, is paid commissions based on the size of the trades it matches. The Treasure Island brokers bring together dealers over the telephone and then enter the transactions manually into the screen, known as 19901.

The firm paid brokers in the Americas on average 61 percent of the revenue they generated in the six months ended in September, ICAP said in a Nov. 14 presentation. The firm pays brokers who use its electronic trading systems about 10 percent to 15 percent of revenue they generate, one of the people said.

Guy Taylor, an ICAP spokesman in New York, declined to comment. ICAP said in an April 9 statement it maintains policies prohibiting price manipulation and is cooperating with the CFTC’s wider inquiry.

The control the Treasure Island brokers exert over the 19901 screen, and the pay that follows, diminishes the chances of them going to a competing inter-dealer broker, according to an ICAP competitor who asked not to be identified because of the lack of authorization to speak publicly.

$7 Million Salary

The top three to five brokers on the desk made $5 million to $7 million annually during the best years, while four to five earned $3 million to $4 million and the least-productive brokers took home $1 million to $2 million, one of the people familiar with the compensation said.

ICAP displaced Tullett & Tokyo Liberty Plc as the provider for rate-swap prices on the 19901 screen in 2002, according to Risk magazine.

“That screen makes or breaks a lot of profit and loss, so clearly there’s a lot of opportunity for influence,” David Kelly, the director of financial engineering at Calypso Technology Inc. in New York, who helped design the underlying analytics of the 19901 screen in the early 2000s, said in an interview this week.

The CFTC is probing the process of setting swaps prices and trading of the derivatives as it works with European regulators in the rate-rigging scandal surrounding the London interbank offered rate.

Libor Probes

ICAP brokers in London passed on requests from dealers asking Libor-setters at rival banks to make favorable submissions, e-mails released as part of the European probe show. UBS AG, Royal Bank of Scotland Group Plc and Barclays Plc (BARC) have paid $2.6 billion in fines for rigging Libor rates.

ICAP is being investigated in the Libor case by Britain’s Financial Services Authority and Canada’s Competition Bureau.

“I’m pleased that the FSA and other regulators are investigating this thoroughly and rooting out any wrongdoing so that the industry can, in time, heal and move on and learn from it and be better for it,” Michael Spencer, ICAP’s chief executive officer, said on a Feb. 7 conference call.

Like Libor, which is the rate at which banks say they would lend to each other, ICAP brokers derive benchmark prices known as ISDAfix from a process where 15 banks submit bids and offers for interest-rate swaps in various currencies and denominations, according to the website of the International Swaps and Derivatives Association. The industry group created the rates in 1998 with predecessors of Thomson Reuters Corp. and ICAP.

Legal Prices

ISDAfix values are accepted as a legal price by which swaps traders can terminate contracts or to mark the value of positions, according to ISDA. The Fed includes them in a daily report on money markets.

The contributors to ISDAfix are Bank of America Corp. (BAC:US), Barclays, BNP Paribas SA, Citigroup Inc., Credit Suisse Group AG (CSGN), Deutsche Bank AG (DBK), Goldman Sachs Group Inc. (GS:US), HSBC Holdings Plc (HSBA), JPMorgan Chase & Co. (JPM:US), Mizuho Financial Group Inc. (8411), Morgan Stanley (MS:US), Nomura Holdings Inc. (8604), Royal Bank of Scotland, UBS and Wells Fargo & Co. (WFC:US), according to ISDA.

One area the CFTC is probing is whether ICAP brokers delayed updating rate-swaps prices on the 19901 screen after they facilitate a trade between banks, said one of the people, who asked not to be identified because the matter is private, and a former broker in ICAP’s Jersey City rate-swaps group.

Publishing stale prices can potentially boost profits for banks in a market where trades are tied to tens of millions of dollars at a time.

ICAP enters the prices manually onto the screen. That allows dealers to tell the brokers to delay putting trades into the system instead of in real time, according to the former broker, who said he witnessed such activity first-hand.

To contact the reporter on this story: Matthew Leising in New York at mleising@bloomberg.net.

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net.


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