Martin Brokers (UK) Limited fined £630,000 for significant failings in relation to LIBOR
15 May 2014 03:36 PM
The Financial Conduct Authority (FCA) has fined
Martin Brokers (UK) Ltd (Martins) £630,000 for misconduct relating to the
London Interbank Offered Rate (LIBOR). Martins would have been fined
£3,600,000 but for the fact that the firm was able to show that it could
not pay a penalty of this amount in addition to the other regulatory fines that
Martins faces in relation to LIBOR.
Martins is the second inter-dealer broker and the sixth
firm overall, to be fined by the FCA for LIBOR-related
failures.
Tracey McDermott, director of enforcement and financial
crime, said:
“Interdealer brokers are expected to act as
trusted intermediaries and are key conduits of market information. Martins
abused this position of trust by providing false information to Panel Banks,
with no regard for the integrity of the market. This is unacceptable behaviour
from any market participant.”
“The culture at Martins was that profit came
first. Compliance was seen as a hindrance and the firm lacked the means to
detect the “wash trades”. In this environment, broker misconduct
was almost inevitable. Similar cultural failings at other firms have caused
havoc in the financial services industry. As we have said before, firms need to
take their responsibilities to uphold market integrity seriously. If firms fail
to heed these warnings then we will take action against
them.”
Between January 2007 and December 2010, Martins colluded
with a trader at UBS to manipulate the (Japanese Yen) JPY LIBOR rates for his
benefit. The misconduct involved Martins deliberately disseminating incorrect
or misleading LIBOR submission levels by:
- communicating skewed suggestions to some Panel Banks as
to where they believed the published JPY LIBOR rate would set for a particular
day (known as "run-throughs");
- creating false (or “spoof”) orders, with the
aim of influencing Panel Banks’ views of the cash market so that they
would make JPY LIBOR submissions at levels that benefitted the UBS trader;
and
- requesting certain Panel Banks to make specific JPY
LIBOR submissions.
The
UBS trader made corrupt brokerage payments to reward Martins for their efforts
to manipulate the LIBOR submissions of panel banks through the use of fake
trades known as “wash trades”.
Martins’ misconduct involved several brokers and
occurred over a number of years. Two brokers (including one manager) were
central to the collusion, although at least three other individuals (including
two managers) spanning two desks played a role.
Martins’ risk management systems and controls were
inadequate to monitor and oversee its broking activity. There was no effective
oversight of the brokers involved, which meant that they were able to freely
engage in misconduct.
The
brokers’ misconduct was exacerbated by a poor compliance culture within
Martins which was a result of its heavy focus on revenue at the expense of
regulatory requirements.
Martins’ inadequate systems, controls, supervision and monitoring meant
that the brokers’ misconduct continued for several years. For similar
reasons, the “wash trades” which were exceptionally large, were not
identified as suspicious.
Martins agreed to settle at an early stage of the
investigation and therefore qualified for a 30% discount under the FCA’s
settlement discount scheme. Without the discount, the fine would have been
£900,000.
This was a significant cross-border investigation and,
in particular, the FCA would like to thank the US Commodity Futures Trading
Commission (CFTC) for their cooperation. Martins also agreed to settle an
action brought by the CFTC, who imposed a financial penalty of $1.2
million.
Notes for editors
- The Final Notice for Martins
- Martins is the second inter-dealer broker firm to be
fined for LIBOR misconduct. Martins offers broking services for a wide range of
financial products, including interest rates, foreign exchange and derivatives.
Given this role, Martins’ brokers have particular market insight into
cash trading prices and expected LIBOR rates and are able to provide their
clients (including Panel Banks) with suggestions as to where they believe LIBOR
will set on particular dates.
- With this settlement, the FCA has now imposed penalties
of £426.63 million on entities for manipulative conduct with respect to
LIBOR submissions. On 27 June 2012, the FCA fined Barclays Bank plc £59.5
million for misconduct relating to LIBOR and EURIBOR. On 19 December 2012, the
Financial Services Authority (FSA), the FCA’s predecessor, fined UBS AG
£160 million for significant failings in relation to LIBOR and EURIBOR,
and on 6 February 2013, the FSA fined The Royal Bank of Scotland plc
£87.5 million for misconduct relating to LIBOR. On September 2013, the
FCA fined ICAP Europe Limited £14 million. On 29 October 2013, the FCA
fined Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A. £105
million.
- On
2 July 2012, the Chancellor of the Exchequer commissioned Martin Wheatley,
chief executive of the FCA (formerly managing director of the FSA), to
undertake a review of the structure and governance of LIBOR and the
corresponding criminal sanctions regime. On 28 September 2012, the Wheatley
Review published its final report ‘The
Wheatley Review of LIBOR’ which included a 10-point plan for
comprehensive reform of LIBOR. On October 2012, the Government accepted the
Review’s recommendations in full, and enacted the Financial Services Act
2012. This Act, which amended the Financial Services and Markets Act 2000 came
into force on 1 April 2013. On 25 March 2013, the FSA published its Policy Statement (PS13/6) setting out the new rules
and regulations for financial benchmarks, following on from the recommendations
of the Wheatley Review and the new provisions of the Financial Services Act
2012. These rules came into force on 2 April 2013.
- The
LIBOR benchmark reference rate indicates the interest rate that banks charge
when lending to each other. It is fundamental to the operation of both UK and
international financial markets, including markets in interest rate derivatives
contracts.
- LIBOR is used to determine payments made under both over
the counter (OTC) interest rate derivatives contracts and exchange traded
interest rate contracts by a wide range of counterparties including small
businesses, large financial institutions and public authorities. Benchmark
reference rates such as LIBOR also affect payments made under a wide range of
other contracts including loans and mortgages. The integrity of benchmark
reference rates such as LIBOR is therefore of fundamental importance to both UK
and international financial markets.
- LIBOR is by far the most prevalent benchmark reference
rates used in euro, US dollar and sterling OTC interest rate derivatives
contracts and exchange traded interest rate contracts. The notional amount
outstanding of OTC interest rate derivatives contracts at end-2012 totalled USD
$490 trillion.
- LIBOR is published on behalf of the British
Bankers’ Association (BBA). There are different panels of banks that
contribute submissions for each currency in which LIBOR is published.
Throughout the Relevant Period between 7 and 16 banks contributed to the
different LIBOR currency panels. Every LIBOR rate was calculated using a
trimmed arithmetic mean. Submissions for each currency and maturity made by the
banks were ranked in numerical order and the highest 25% and lowest 25% were
excluded. The remaining contributions were then arithmetically averaged to
create the final published LIBOR rate.
- On
1 April 2013 the FCA became responsible for the conduct supervision of all
regulated financial firms and the prudential supervision of those not
supervised by the Prudential Regulation Authority (PRA).
- The
FCA has an overarching strategic objective of ensuring the relevant markets
function well. To support this it has three operational objectives: to secure
an appropriate degree of protection for consumers; to protect and enhance the
integrity of the UK financial system; and to promote effective competition in
the interests of consumers.
- Find out more information about the FCA.