Rate Manipulation News May Shake Investor Confidence in Markets

The news stream on alleged benchmark manipulations in different markets continues, including commodities, interest rates and FX.  While banks have only admitted wrongdoing in the LIBOR scandal, the news in just the past week has been widespread and includes:

1) Reports of firings and suspensions have been increasing in frequency, to include 2       employees suspended at each Citi and HSBC just this past Friday. 

2) Deutsche Bank is withdrawing from the London Gold fix.

3) German regulator Bafin says that the alleged gold and FX manipulations are worse than the LIBOR scandal as they would include actual trades rather than reported rates. 

4) A new mechanism and administrator for the LIBOR fix (ICE) has been announced

5) New regulators, now the Federal Reserve and the Monetary Authority of Singapore, are joining the FX benchmark investigation.

The connection in all of these alleged scandals is that a limited number of large market participants are colluding to set benchmark prices that bring greater profits to themselves at the expense of their clients and other investors.  Large notional amounts of executed financial transactions are directly impacted by being priced at allegedly rigged rates.  All of the holdings of investors in funds whose assets are marked to market at manipulated rates are indirectly impacted when shares are purchased or sold. If true, the scope is such that large swaths of the investment landscape may have been affected by one or more of these collusions.

Banks have admitted wrongdoing in the LIBOR scandal and have paid $6 billion in fines to date.  Investigations continue in the ISDAfix, FX WM Reuters London Close, the London Gold fix, oil and other commodities as well.  It can be inferred from the banks’ personnel actions, that they too see improper activity by traders.  In fact, these reports have come up so quickly, in so many markets, that all benchmarks may very well now be suspect in the eyes of investors.  

What is most important is that regulators thoroughly review the actions of market players and then fully report to the investment world what has occurred.  Only by such investigations, proving to investors that the markets are not (or no longer) rigged against them, can new more reliable benchmarks be devised, and investor faith in the fairness and efficiency of markets be maintained (restored).