Bloomberg News

ISDA to Change Calculation for Swaps Rate Amid Regulatory Probe

September 12, 2013

CFA Managing Director Martin Wheatley

The benchmark ISDAfix rate is under investigation by the U.S. Commodity Futures Trading Commission and the U.K.-based Financial Conduct Authority for possible manipulation, FCA head Martin Wheatley said earlier this week. Photographer: Simon Dawson/Bloomberg

The International Swaps & Derivatives Association plans to change how it calculates a benchmark measure of interest-rate swaps that U.S. and U.K. regulators are investigating for possible price manipulation.

The organization is working to base the rate, known as ISDAfix, on actual trades from several trading systems rather than just bank submissions, with a goal of finishing within six months, said Morgan Stanley (MS:US)’s Ed Ocampo, chairman of ISDA’s benchmark committee. The test phase of the project is based on trades denominated in euros and will move to U.S. dollar rates if successful, he said today at a conference in New York.

“Very much at the top of the agenda is renovating ISDAfix,” he said. The measure will be based on electronically traded swaps where “there are firm, actionable prices,” he said.

ICAP (IAP) Plc controls the U.S. dollar swap submissions for ISDAfix from its Jersey City, New Jersey, office, and plays an exclusive role in the lucrative trading that helps set the rate. Broadening the calculation to other platforms threatens to loosen ICAP’s grip on ISDAfix a decade after it acquired control of the computer screen used by the industry to price swaps in the $379 trillion market.

The U.S. Commodity Futures Trading Commission and the U.K. Financial Conduct Authority are investigating alleged manipulation of ISDAfix, FCA Chief Executive Officer Martin Wheatley told lawmakers in London this week.

E-mails, Calls

The CFTC is going over 1 million e-mails as well as taped phone calls as it examines whether ISDAfix, which helps determine everything from interest on annuities to borrowing costs on bonds linked to skyscrapers, was manipulated, a person familiar with the situation said earlier this year.

“The world has moved on so we need to change it to meet evolving standards,” Serge Gwynne, a partner at consultant Oliver Wyman Group who is also on the benchmark committee, said today. ISDA hired Oliver Wyman earlier this year to help it assess changes to ISDAfix. The aim is to eventually discontinue altogether the bank submission model, he said.

The FCA review comes after the CFTC issued subpoenas to current and former brokers at ICAP, ISDA and 15 Wall Street dealers as part of its probe, Bloomberg News reported on April 8. Two people familiar with the matter told Bloomberg News in April that the FCA and CFTC were looking into whether ISDAfix had been manipulated.

Banks Benefit

By rigging ISDAfix, the banks stood to profit on separate derivatives trades they had with clients who were seeking to hedge against moves in interest rates. Banks sought to change the value of the swaps because the ISDAfix rate sets prices for the other derivatives, which are used by firms such as Pacific Investment Management Co., said a person familiar with the matter, who asked not to be identified because the details aren’t public.

ISDAfix is currently determined daily by a panel of banks based on their submissions of the midpoint of their rate swap trades. Trading via ICAP brokers in Jersey City creates a reference rate just before 11 a.m. New York time each day that banks then accept or alter as their ISDAfix submission.

Brokers on ICAP’s rate swap desk in Jersey City -- who are the focus of the investigation -- were paid as much as $7 million a year at the market’s peak, earning the group the nickname “Treasure Island,” two people familiar with the matter said in April.

Brokers’ Pay

The team of about 20 brokers 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 more than a decade 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.

ICAP collects the ISDAfix submissions from dealer banks for the rate that’s denominated in U.S. dollars, while Thomson Reuters Corp. calculates the figure, according to ISDA’s website. In all other ISDAfix currencies, Thomson Reuters collects and calculates the rate, according to the site.

Bloomberg LP, the parent of Bloomberg News, competes with ICAP in some businesses, including foreign-exchange and swaps trading, and with Thomson Reuters in providing financial data.

The trading systems that will be used in the testing phase by the ISDA benchmark committee are owned by ICAP, Cie. Financiere Tradition SA and Tullett Prebon Plc, Gwynne said.

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

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net


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