Years on, ASIC still grappling with swap rate fixing scandal

There is evidence Australia’s bank bill swap rate was manipulated: so what now for regulators? AAP/Dan Peled

The wheels of justice grind exceedingly slow and nowhere slower than in the Sydney headquarters of the Australian Securities and Investments Commission (ASIC). A recent report appears to show that ASIC is still, just under two years after the events, following leads on possible manipulation of the Australian interest rate benchmark, the Bank Bill Swap Rate (BBSW).

We know the BBSW was manipulated as evidenced by an enforceable undertaking by the French bank BNP-Paribas almost one year ago. What we don’t know yet is whether there was any evidence of involvement by Australian banks and, if so, to what extent? But it would not come as a complete surprise if local banks had been involved.

However, the question of whether Australian banks were involved or not in manipulation is irrelevant. There was indeed manipulation and it went unreported to ASIC until overseas regulators began to investigate manipulation of the widely used LIBORbenchmark. There are two scenarios. First, local bankers (as the major players in the BBSW market) knew there was manipulation and did nothing, benefiting from the outcomes. Alternatively, they did not know of the manipulation, in which case they come across as provincial dopes. Either way the Masters of Martin Place do not come out of the scandal very well.

After strenuously denying for years that the BBSW could possibly be manipulated, the Australian Financial Markets Association (AFMA) changed the BBSW calculation methodology in July 2013 to one which collected live rates from the market, rather than expert opinion, to calculate the benchmark. Supposedly this would be less prone to manipulation. How wrong they were.

Just last November, in what was obviously a coordinated effort, regulators in three countries announced fines of more than US$4.3 billion on six banks found to have manipulated the most widely used benchmark in the global Foreign Exchange (FX) market. As with LIBOR, manipulation of the London “WMR 4 o’clock FIX” was long running, widespread and profitable. But unlike LIBOR, the “FIX” was calculated from live market rates, and supposedly manipulation-proof. But human ingenuity and greed finds ways around such trivial obstacles.

The regulators found that traders from the world’s largest banks colluded, through conversations in internet chat rooms, to “nudge” the FX market in a particular direction to benefit their own positions rather than their customers. Traders found that it was sufficient to manipulate the market for only about 60 seconds “around the FIX” to generate illicit profits.

In its latest triennial survey of activity in the FX market, the Bank for International Settlements (BIS) found that the Australian dollar was one of the top five most traded currencies accounting for some 8.6% of overall volume. Although the initial fines concentrated on manipulation of the major currencies (the US dollar, the Euro and the British Pound) it stretches credibility to believe that traders did not also manipulate the Aussie benchmark rate. In fact, because of the time at which the benchmark was calculated (4pm GMT), the local markets would have been closed and hence, because there was less competition, the benchmark would have been easier to fudge.

Why is such manipulation important? Australian superannuation funds that have an international component, such as US shares, are regularly revalued against the market, often on a daily basis. Any manipulation will then directly affect the value of the funds, sometimes up and sometimes down, but most often to the benefit of the banks rather than pensioners.

Under Chairman Greg Medcraft, ASIC has announced an investigation into possible manipulation of FX benchmarks, which is due to complete sometime early this year. And in a recent chat with journalists, Medcraft declared that Australia was a “paradise for white collar criminals” a comment he then backed away from after being contacted by the finance minister Mathias Cormann.

At this stage it would be customary to call for an in-depth inquiry into the banking industry and its ethics, but in the wake of the toothless tiger that was the Murray Inquiry which had only one reference to LIBOR (in relation to Withholding Tax), such a suggestion would fall on deaf ears. Medcraft has repeatedly made a strong push for additional funding for ASIC and heeding him, the Murray Report has recommended that an “industry funding model” be introduced - that is, “abuser pays”.

If the ASIC inquiry finds evidence of misconduct (and arguably even if it doesn’t in this particular case), the government should promptly allocate all of the funding that the corporate regulator needs. And, more controversially, ASIC, because it is too thinly spread, should be broken up to allow it to concentrate on preventing misconduct in the Australian financial system, if indeed it is such a paradise for white collar criminals.

Less controversially, AFMA is a trade association, governed by its members, the largest banks in Australia and the world. There is an obvious conflict of interest in also being the administrator of the BBSW benchmark. As in the UK, that responsibility should be delegated to an independent body.

It is also a conflict of interest for any industry body to set the code of conduct for its members’ employees. Though AFMA’s code of conduct specifically forbids market manipulation, the Board contains senior representatives of banks that have been fined for both FX and LIBOR manipulation. Furthermore, the AFMA code has not been updated since the revelations of wide-spread market manipulation; it is bland and ineffectual. ASIC should ensure that proper conduct including financial benchmarks is part of each firm’s corporate code of conduct and is strictly enforced by them.