The Royal Bank of Scotland plc (RBS) has been fined a total of US$612 million by U.S. and British authorities for misconduct relating to the London Interbank Offered Rate (LIBOR).
RBS is paying 87.5 million pounds ($137 million) to the United Kingdom's Financial Services Authority, $150 million to the U.S. Department of Justice and $325 million to the U.S. Commodity Futures Trading Commission, which regulates trade in derivatives.
The U.S. Department of Justice said the bank was guilty of a "stunning abuse of trust".
In a press statement, the FSA says RBS’ breaches of the former’s requirements encompassed a number of issues, involved a number of employees and occurred over a number of years.
The individuals involved in the misconduct were located in the UK, Japan, Singapore, and the US. Between January 2006 and November 2010 the misconduct included:
1. RBS making Japanese yen (JPY) and Swiss franc (CHF) LIBOR submissions that took into account its derivatives trading positions.
2. RBS allowing derivatives traders to act as substitute submitters and make JPY LIBOR submissions that took into account its derivatives trading positions.
3. RBS making JPY, CHF and US dollar (USD) LIBOR submissions that took into account the profit and loss (P&L) of its money market trading books.
4. RBS derivatives traders colluding with other LIBOR panel banks and interdealer broker firms to influence the JPY LIBOR submissions made by other panel banks, including one derivatives trader entering into “wash trades” (i.e. risk free trades that cancelled each other out and for which there was no legitimate commercial rationale) in order to make corrupt brokerage payments to one broker firm to garner influence. The derivatives trader used this influence to get the broker firm to try to change other panel banks’ JPY LIBOR submissions.
5. RBS derivatives and money market traders colluding with individuals at other panel banks and interdealer broker firms who sought to influence RBS’ JPY and CHF LIBOR submissions.
The FSA says the misconduct was widespread. At least 219 requests for inappropriate submissions were documented – an unquantifiable number of oral requests, which by their nature would not be documented, were also made.
At least 21 individuals including derivatives and money market traders and at least one manager were involved in the inappropriate conduct.
According to FSA, RBS failed to identify and manage the risks of inappropriate submissions. RBS established a business model that sat derivatives traders next to LIBOR submitters and encouraged the two groups to communicate without restriction despite the obvious risk that derivatives traders would seek to influence RBS’ LIBOR submissions.
RBS also allowed derivatives traders to act as substitute LIBOR submitters which created an obvious risk that derivatives traders would make submissions that took into account their trading positions. RBS also failed to identify and manage the risk that money market traders would take the P&L of their money market books into account when making RBS’ LIBOR submissions.
RBS did not have any LIBOR-related systems and controls in place until March 2011, failed to adequately address the risk that derivatives traders would seek to influence RBS’s LIBOR submissions until June 2011, and failed to adequately address the risk that money market traders would take into account the impact of LIBOR on the profitability of transactions in their money market books, until March 2012.
In response to a specific request by the FSA as a result of its enquiries into LIBOR, RBS attested to the FSA in March 2011 that its LIBOR related systems and controls were adequate. This was inaccurate as RBS’ systems and controls were inadequate.
Although it had reviewed its LIBOR submission process in February and March 2011 at the FSA’s instigation RBS had failed to identify the risks that submitters would make LIBOR submissions that took into account derivative trader requests and the impact on the profitability of transactions in their money market books.
From January 2005 through to March 2012, RBS also failed to have adequate transaction monitoring systems and controls that would have assisted it to detect wash trades.