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A decade of market manipulation, regulatory failures and regulatory reforms
Author: Oonagh McDonald

This book provides a compelling account of the rigging of benchmarks during and after the financial crisis of 2007–8. Written in clear language accessible to the non-specialist, it provides the historical context necessary for understanding the benchmarks – LIBOR, in the foreign exchange market and the Gold and Silver Fixes – and shows how and why they have to be reformed in the face of rapid technological changes in markets. Though banks have been fined and a few traders have been jailed, justice will not be done until senior bankers are made responsible for their actions. Provocative and rigorously argued, this book makes concrete recommendations for improving the security of the financial services industry and holding bankers to account.

Oonagh McDonald

Chapter 10 Holding senior bankers to account As the fines imposed on banks for their part in the manipulation of LIBOR, the foreign exchange market and the Gold and Silver Fixes have mounted up, the question posed by the public both in the UK and in the USA is: why have so few senior bankers gone to jail? The public saw a handful of traders tried and jailed (and sometimes set free on appeal) and a few senior bankers resigned or were asked to resign, while retaining comfortable pensions and even bonuses. The UK and EU regulators considered that reforming the

in Holding bankers to account
Oonagh McDonald

Chapter 2 The evolution of LIBOR What is LIBOR? LIBOR is the London Interbank Offered Rate, that is, the interest rate at which banks offer to lend funds to each other in the international interbank market. It is an indication of the costs of unsecured borrowing for the banks. It is a benchmark that reflects the interest rate, credit premium and liquidity premium that a leading bank would expect to be offered by a similar bank. It is set at 11 a.m. UK time in 10 currencies and for several maturities. Until 1 February 2014, LIBOR was owned by the British Bankers

in Holding bankers to account
Oonagh McDonald

-dealer platforms, they could see a blended rate on one screen, such as a bid from Deutsche Bank and an offer from UBS. Although the percentage of flows transacted through these APIs (application programme interfaces) was only about 5% at first, it was the beginning of much more dramatic changes. In his interesting account of his life as a banker, Kevin Rodgers explains the impact of two changes which occurred in 2005. The first 146 A decade of change in the foreign exchange market step was taken by Barclays, which involved an additional decimal point, which hardly seemed an

in Holding bankers to account
Abstract only
Oonagh McDonald

has, at least until recently, risen relentlessly … [but] while these pressures have propelled Libor into public view, it has come at the very moment 108 LIBOR, a chequered history that some bankers are quietly starting to question its value … prompting suggestions that Libor is no longer offering such an accurate benchmark as before. According to Tett, the treasurer of one of the largest City banks had complained that ‘Libor rates are a bit of a fiction. The number on the screen doesn’t always match what we see now.’ The banks used to quote rates that were

in Holding bankers to account
Oonagh McDonald

another aspect of regulation. Johnson Matthey Bankers Ltd (JMB), a member of the London Gold Fix, was the subsidiary of a long-established company, specialising in a wide range of operations, including chemicals, emission control technologies, precious metal products and banking. In 1980, JMB had made the mistake of moving into the US jewellery trade, a new venture into unfamiliar territory, resulting in losses of over £60 million. Although JMB had benefited from the increase in bullion sales after the Soviet invasion of Afghanistan in 1980, the subsidiary was

in Holding bankers to account
Oonagh McDonald

story in the case of RBS, but for both banks, LIBOR manipulation provides examples of the lack of responsibility on the part of senior management for the way in which the business of the bank was conducted. Of course, these were not the only banks involved in the manipulation of LIBOR. Others were deeply involved as well, and the ways in which others misused LIBOR are explored in the next chapter. Notes  1 Carrick Mollenkamp, ‘Bankers cast doubt on key rate amid crisis’, Wall Street Journal, 16 April 2008, available at https://www.wsj.com/articles/ SB

in Holding bankers to account
Oonagh McDonald

became a broker with offices in the Bank of England. The following nine generations presided over the firm until 1976, when family participation in the firm ended. Their position as sole bullion brokers to the Bank of England came to an end in 1840, when the Bank of England finally opened its doors to ‘any sworn broker in the purchase and sale of gold bars’.1 The Mocatta & Goldsmid company was joined by Sharp Wilkins (later Sharps Pixley), Johnson Matthey, Samuel Montagu, bankers and bullion brokers, which opened in 1853, and N. M. Rothschilds. The Rothschilds had a

in Holding bankers to account
Oonagh McDonald

run by rotating chairmen, all ex-bankers, but in March 2017 they were replaced by a price-fixing algorithm. Now there is no human input. A further change, which took place in April 2017, was the introduction of central clearing to the gold price auction, enabling a wider range of participants to join it. By July 2017, over 4 million troy ounces of gold had cleared the market through ICE, the equivalent of nearly $5 billion. The volume that is cleared increased from 30% at the launch of central clearing to 67% for the week ending 28 July 2017. In July 2017, the LBMA

in Holding bankers to account
Oonagh McDonald

1 From Cotton Trader to Investment Banker: 1844–2008 A brief history On 29 January 2008, Lehman Brothers Holdings Inc reported record revenues of nearly $60bn and record earnings of over $4bn for its fiscal year ending 30 November 2007. Just eight months later, on 15 September 2008, Lehman Brothers sought Chapter 11 protection in the largest bankruptcy ever filed. Its collapse sent shock waves around the world. Everyone remembers the name, Lehman Brothers. Many regard its collapse as the cause of 2008's financial crisis

in Lehman Brothers