Best of the Week
Most Popular
1.Is the Stocks Bull Market Over? Dow Trend Forecast into End January 2015 - Nadeem_Walayat
2.Gold and Silver Stocks Apocalypse Now, Bear Market Review - Rambus_Chartology
3.NHS Baldrick Plan to Spread Ebola Across UK - Sheffield, Newcastle, Liverpool, London Hospitals - Nadeem_Walayat
4.Ebola Terror Threat Suicide Bio-Weapons Threatens Multiple 9/11's, Global Plague - Nadeem_Walayat
5.Second-Richest Man Says Mortgages Now a "No Brainer" - Dr. Steve Sjuggerud
6.Gold And Silver Still No End In Sight - Michael_Noonan
7.NHS Baldrick Plan to Spread Ebola Across UK - Sheffield, Newcastle, Liverpool, London Hospitals - Nadeem_Walayat
8.The Gold Bug is Set to Bite Back - EWI
9.How Alibaba Could Capitalize on the EBay-PayPal Split - Frank_Holmes
10.The Consequences of the Economic Peace - John_Mauldin
Last 5 days
Focus on Graphite Companies with Green Energy and Technology Strategies - 22nd Oct 14
Crude Oil Price Hitting Bottom - 22nd Oct 14
Evidence of Another Even More Sweeping U.S. Housing Market Bust Already Starting to Appear - 22nd Oct 14
Gold Or Crushing Paper Debt Stocks Crash? - 22nd Oct 14
India Gold Demand Surges 450% and Bank of Russia Demand At 15 Year High - 22nd Oct 14
Bitcoin Stock Exchange Could Be "More Valuable than Alibaba" - 22nd Oct 14
Currency War - How to Profit from a Stronger U.S. Dollar - 22nd Oct 14
Banks Hold Treasuries and Make Loans- 22nd Oct 14
Gold and Silver Timing is Everything - 22nd Oct 14
Don't Get Ruined by These 10 Popular Investment Myths (Part VII) - 22nd Oct 14
Follow the Baby Boom to Biotech Stock Profits - 22nd Oct 14
Copper, Nickel and Zinc Won't Be Cheap for Long - 22nd Oct 14
How Will We Know That the Gold & Silver Price Bottom Is In? - 21st Oct 14
Is Gold as Dead as Florida Hurricanes? - 21st Oct 14
First Swiss Gold Poll Shows Pro-Gold Side In Lead At 45% - 21st Oct 14
The Similarities Between Germany and China - 21st Oct 14
The REAL Reason Why the Stock Market Turned Down - 21st Oct 14
Petrobras is a 'Scheme, Not a Stock' - 21st Oct 14
Stocks Bear Market Indicator Is Off the Mark - 20th Oct 14
Stock Market Ideal Turning Point is at Hand - 20th Oct 14
Investors Quit Complaining, The Environment is Perfect Right Now - 20th Oct 14
Ebola Armageddon Could Trigger a Rebirth in Gold and Silver Prices - 20th Oct 14
Gold vs Euro Risk Due To Possible Return of Italian Lira - Drachmas, Escudos, Pesetas and Punts? - 20th Oct 14
Stocks Rebounded Following Recent Sell-Off, But Will It Last? - 20th Oct 14
U.S. Responsible for West Africa Ebola Outbreak Says Liberian Scientist - 20th Oct 14
Stock Market Intermediate B Wave has Started - 20th Oct 14
Gold Stocks Analysis – FNV, CG, NCM, SBM - 19th Oct 14
Stock Market Primary IV Wave Counter Trend Rally - 19th Oct 14
Gold And Silver - Financial World: House Of Cards Built On Sand - 18th Oct 14
Anatomy of a Stock Market Sell-Off - 18th Oct 14
Why OPEC Has Declared an Oil War on Russia - 18th Oct 14
Gold and Silver Extreme Shorting Peaks - 18th Oct 14
Bitcoin Price Fall to $350? - 18th Oct 14
Tesco Supermarket Crisis Worse To Come as Customers Vanish! - 18th Oct 14
Sheffield Roma Crisis School Place Application's Fraud Perfect Storm - 17th Oct 14
Stock Markets, Commodities and Indicators - 17th Oct 14
“Save Our Swiss Gold ” - Game Changer For Gold? - 17th Oct 14
How to Trade the Ebola Stock Market Sell-Off - 17th Oct 14
When... Not if... Crude Oil Price Drops Below $70 - 17th Oct 14
Either You're The Butcher or You're The Cattle - 17th Oct 14
Gold Benefits from Market Uncertainty - 17th Oct 14
Stock Market Pullback Underway, Euro downside, Commodities - 17th Oct 14
Stock Market Seven Year Cycle and A Correction Ahead? - 17th Oct 14
Three Ways to Play Uranium: Top Stock Picks - 17th Oct 14
America Flirts With Deflation - 17th Oct 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Stocks Epic Bear Market

The Next Wall Street Mega-Scandal Has Arrived

Stock-Markets / Credit Crisis 2013 May 02, 2013 - 12:37 PM GMT

By: Money_Morning

Stock-Markets

Shah Gilani writes: Well, it looks like the major financial institutions can't learn a lesson. They're neck deep in yet another financial scandal of global proportions.

U.S. and international securities regulators investigating manipulation of LIBOR, the world's most important set of benchmark interest rates, have uncovered another price-rigging scheme, this one in the $379 trillion market for interest rate swaps.


$379 Trillion, not Billion. Trillion.

The Commodity Futures Trading Commission (CFTC) has already issued subpoenas to Wall Street's biggest banks and is interviewing a dozen former and current brokers from the Jersey City, NJ, offices of ICAP Plc.

For investors in the big banks, new revelations may put an end to the upward push to the groups' stock prices, whose earnings of late have been helped by reductions in reserves meant as a cushion against future asset hits and litigation expenses.

Examples of ISDAFIX users

ISDA developed ISDAFIX to facilitate the determination of exercise values for cash-settled swap options. The existence of such a benchmark provides a transparent (in theory), readily available value to which parties to a transaction can refer as a settlement rate. Without such a benchmark, it might be necessary to go through the process of calling a number of active dealers for quotes in order to settle transactions.

The 2006 ISDA Definitions refer specifically to ISDAFIX rates as a means of settlement of over-the-counter derivatives transactions. In the sample Swaption Confirmation in the 2006 ISDA Definitions (Exhibit II-E), for example, the parties can include 'ISDA Source' - that is, ISDAFIX - as the reference settlement rate under Settlement Terms.

ISDAFIX is also used as a reference rate for cash settlement in connection with early terminations of swap transactions. In addition, dealers often use ISDAFIX as an input when marking their swap portfolios to market.

Beyond their use in settling over-the-counter-traded transactions, ISDAFIX rates are also used as a rate or curve source in various exchange products. LIFFE, for example, uses ISDAFIX as the source of the swap curve in calculating the settlement price of its Swapnote futures contract.

In addition, both the Chicago Mercantile Exchange and the Chicago Board of Trade use ISDAFIX as the settlement price in their swap futures contracts. In the United States, the Federal Reserve uses ISDAFIX as the source for USD swap rates in its H.15 Statistical Release.

http://www2.isda.org/asset-classes/interest-rates-derivatives/isdafix/#Fixfix

Blackbeard's Legacy
According to a former broker from London-based ICAP's Jersey City swap desk, nicknamed "Treasure Island" for the huge commissions and pay packages traders there are accustomed to, brokers routinely manipulated prices on behalf of bank clients to benefit bank trading desks.

On the other side of the banks' trades are tens of thousands of counterparties who may have lost hundreds of billions of dollars as a result of having to pay more interest, or may have received less interest, on swaps whose prices were manipulated.

ICAP, formerly Intercapital Brokers, initially hit regulators' radar as part of the LIBOR scandal. According to the July 7th, 2012 print edition of the Economist,
"Court documents filed by Canada's Competition Bureau have also aired allegations by traders at one unnamed bank, which has applied for immunity, that it had tried to influence some LIBOR rates in cooperation with some employees of Citigroup, Deutsche Bank, HSBC, ICAP, JPMorgan Chase and RBS."

Far from being in a shady corner in the world of derivatives, interest rate swaps are a mainstream financing tool used by tens of thousands of corporate treasurers worldwide.

Interest rate swap prices are used to set the value of over $550 billion of commercial real estate collateralized bonds and are used to calculate pension annuity values and benefits. (Other examples of where swap rates are used, from the ISDA website, are in the sidebar.)

Big Banks in Big Trouble, Again?
Mega-banks primarily facilitate interest rate swaps by initially taking the other side of customers' trades and are responsible for establishing pricing of these instruments in conjunction with a handful of brokers.

Similarly to how LIBOR is calculated, the ISDAFIX, the benchmark series of rates used to price interest rate swaps for U.S. dollar denominated swaps, is convened by a "panel" of banks.

The panel, according to the International Swaps and Derivatives Association consists of: Bank of America Corp., Barclays, BNP Paribas SA, Citigroup Inc., Credit Suisse AG, Deutsche Bank AG, Goldman Sachs Group Inc., HSBC Holdings Plc, JPMorgan Chase & Co., Mizuho Financial Group Inc., Morgan Stanley, Nomura Holdings Inc., Royal Bank of Scotland, UBS and Wells Fargo & Co.

The banks submit their quotes for a range of maturities to ICAP through a secure screen connection. ICAP then forwards those data points to Thompson Reuters, who calculates the actual swap rates. Rates are then disseminated to over 6,000 viewers.

An Easy Con in an Era of Regulation
Manipulation of rate pricing is easy. ICAP posts rates, supposedly based on transactions and bid and offer quotes it receives and enters manually into what's known as the 19901 screen (named for the Reuters screen page number). Banks don't have to submit their own rates as part of the panel; they can use the suggested rates ICAP posts. Or they submit their own rates to ICAP to be forwarded to Thompson Reuters who calculates the final numbers.

ICAP sits in the middle, entering by-hand prices and rates from the transactions that occur through their brokerage desk, which average a staggering $1.4 trillion a day.

Not only can banks ask ICAP brokers to post whatever quote benefits the bank's internal trading book, whether it's to affect a positive mark-to-market closing price for accounting and profit and loss (bonus) calculations, or manipulate an entry price on a new trade with a counterparty, they allegedly ask ICAP brokers to delay entry of actual transactions until after ISDAFIX rates are disseminated.

The delay can easily create a beneficial entry price on a trade that would otherwise be priced based on fresh data. Manipulation of prices and rates has huge profit and loss and mark-to-market implications in terms of capital reserve ratios and other bank balance sheet metrics.

Of course, these allegations have yet to become indictments, and nothing may come out of any of this but a few little fines and some slapped wrists. And if the past is actually prologue, we can rest assured that no criminal charges will ever be tossed into the casino, since none ever are.

After all, the tumbling dice always favor the house, and we know whose house it is.

Source :http://moneymorning.com/2013/05/02/the-next-wall-street-mega-scandal-has-arrived/

Money Morning/The Money Map Report

©2013 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2014 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Free Report - Financial Markets 2014