Finance

Citi was fined $425 million for rate manipulation — here are the secret trader transcripts

Oscar Williams-Grut

2016-05-26T08:59:06Z

Former trader Tom Hayes arrives at Southwark Crown Court in London, Britain July 30, 2015. The jury in the London trial of former trader Tom Hayes, who is charged with eight counts of conspiracy to defraud by manipulating global Libor interest rates, is considering its verdict after hearing nine weeks of evidence. Hayes, a 35 year old former UBS and Citigroup yen derivatives trader based in Tokyo, pleaded not guilty to charges he conspired to rig the London interbank offered rate (Libor), a benchmark for $450 trillion of financial contracts and loans worldwide, between 2006 and 2010. — Former Citi trader Tom Hayes is the only person so far to be convicted of fixing Libor. He is allegedly referenced in the evidence against Citi. REUTERS/Peter Nicholls

The US Commodity Futures Trading Commission fined Citibank a combined $425 million (£288.5 million) on Wednesday to settle various rate-fixing allegations from 2007 to 2012.

The allegations center on the manipulation of Libor, a measure of rates that banks will lend to other banks at, and Isdafix, a measure used to set interest rates on swaps.

While you might not have heard of these measures, the two benchmarks are used to set the price of products worth millions, if not billions, each day. In other words, they have a huge effect on the economy.

The CFTC says Citi "on multiple occasions attempted to manipulate, and made false reports" about the Isdafix.

The bank is also "charged with attempting to manipulate Yen LIBOR and Euroyen TIBOR, and CJL [Citigroup Japan Ltd] with false reporting of Euroyen TIBOR, to benefit derivatives trading positions that were priced based on Yen LIBOR or Euroyen TIBOR."

"Separately, Citi is charged with the false reporting of U.S. Dollar LIBOR at times to avoid generating negative media attention and to protect its reputation during the financial crisis from the spring of 2008 through the summer of 2009."

That's quite a rap sheet.

Alongside the ruling, the CFTC published evidence taken from chat logs and phone transcripts pointing to the manipulation. We've picked out some of the most eye-catching parts below:

"... moved the screen btw"

The CFTC says: "Citibank, by and through certain of its traders, attempted to manipulate and made false reports concerning USD ISDAFIX by skewing the Bank's USD ISDAFIX submissions, in the Bank's role as a panel bank in the USD ISDAFIX setting process, in order to benefit the Bank's trading positions at the expense of its derivatives counterparties."

In short, traders leaned on bankers at Citi who set Isdafix to move it in a way favorable to them. They also planned the timing of trades to make sure they influenced the Isdafix.

The CFTC says: "In addition, Citibank, through its traders, bid, offered, and executed trades in targeted interest rate products, including swap spreads and U.S. Treasuries, in a manner designed — including in timing and pricing — to influence the published USD ISDAFIX to benefit the Bank in its derivatives positions, according to the Order."

"... you think we can push the 2y spread lower before 11?"

The CFTC says Citi cooperated with its investigation but initially made incorrect claims about its fixing.

The regulator says: "According to the Order, Citibank's cooperation improved after the Division said that it expected the Bank to make productions more expeditiously, after which Citibank discovered and produced evidence showing that its initial statements about certain misconduct were incorrect."

"[I]s it easy to push these days?"

Aitan Goelman, the CFTC's director of enforcement, says in the statement on the settlement: "The CFTC's order demonstrates that we will vigorously continue to investigate any efforts to manipulate financial benchmarks, and we will take action where possible to protect the integrity of these benchmarks."

The CFTC has fined 17 banks and brokers a collective $5.08 billion for fixing Libor and Isdafix and manipulating FX rates.

"I could do the high 6 month LIBOR... like... right now"

Citi's fines are split in two: $250 million for manipulating the Isdafix and $175 million for manipulating various Libor and Tibor rates. The second fine involves Citi's Japanese subsidiaries.

The Libor and Tibor manipulation, self-reported by Citi in the summer of 2010, occurred after Citi was already on notice from the CFTC about manipulating its US dollar Libor submissions.

"After june I will push for higher libors"

The "Senior Yen Trader" mentioned in the two above examples was "hired by CGMJ [Citigroup Global Markets Japan] to enhance the bank's reputation in the Tokyo derivatives market," according to the CFTC. The Financial Times reports that this trader was Tom Hayes, the only person so far to be convicted over Libor fixing. Hayes joined Citigroup from UBS in 2009.

Hayes "attempted to manipulate the benchmark fixings by using his contacts at other Yen LIBOR panel banks and at interdealer brokers to influence the Yen LIBOR submissions of other Yen panel banks," according to the CFTC. Hayes was fired by Citi in 2010 for fixing Libor.

"We don't want to come down within the next 4 weeks"

"In addition, a senior manager who ran CGMJ's Tokyo interest rates derivatives trading desk (Senior Yen Manager) pressured CJL's Euroyen TIBOR submitters to adjust their submissions to benefit the Senior Yen Trader's derivatives trading positions," the CFTC says. This contrasts with Citi's past argument that Hayes was a lone wolf who fixed the rates without management's knowledge.

"CJL's Euroyen TIBOR submitters, on a few occasions, took the Senior Yen Manager's requests into account when making Euroyen TIBOR submissions," the CFTC says.

"Given the potential negative publicity that this could have I would go lower"

Citi also fixed its Libor submissions during the financial crisis to make it look as if it were having an easier time borrowing than it was. Libor is meant to measure the interest rate that other banks would theoretically lend to you at.

The CFTC says: "From the spring of 2008 through the summer of 2009, Citi's U.S. Dollar LIBOR submitters based its U.S. Dollar LIBOR submissions on a desire to avoid generating negative media attention and to protect Citi's reputation in the market.

"As the financial crisis progressed through 2008, Citi experienced financial challenges that included liquidity concerns. During this time, Citi received a significant infusion of funds from the U.S. Government to alleviate the stresses in its funding. Citi, at times, had difficulty securing funding in the London interbank market at or below Citi's LIBOR submissions, particularly in the longer tenors.

"Citi's U.S. Dollar LIBOR submitters became concerned about the signaling effect that the Citi’s U.S. Dollar LIBOR submissions could have in the market. The submitters realized that the Citi's submissions could draw negative media attention and raise questions about the stability of the bank. Accordingly, during this period, Citi's submitters, at times, made U.S. Dollar LIBOR submissions based in whole or in part on a desire to avoid that negative scrutiny, rather than based on the fact that Citi, at times, would have had to pay above LIBOR in the London interbank market, particularly in the longer tenors, when securing funding for the bank."