The U.S. Commodity Futures Trading Commission (“CFTC”) announced an Order today against UBS AG and UBS Securities Japan Co., Ltd. (together “UBS” or the “Bank”), bringing and settling charges of manipulation, attempted manipulation and false reporting of certain global benchmark interest rates. These benchmarks, which are enormously significant to the American public and to financial markets, are the basis for hundreds of trillions of dollars of swaps transactions, commercial and consumer loans, futures contracts, and other financial derivatives products traded in over-the-counter markets and exchanges around the world. The Order requires UBS to pay a $700 million civil monetary penalty, cease and desist from further violations as charged, and take specified steps to ensure the integrity and reliability of its LIBOR and other benchmark interest rate submissions and improve related internal controls. (This was part of a larger joint fine levied by numerous regualtors).
In summary, CFTC’s Order finds:
- For at least six years UBS regularly tried to manipulate multiple benchmark interest rates for profit, and at times succeeded in manipulating the official fixing of Yen LIBOR;
- More than 2,000 instances of unlawful conduct involving dozens of UBS employees, colluding with other panel banks, and inducing interdealer brokers to spread false information and influence other banks; and
- UBS made false U.S. Dollar LIBOR and other submissions to protect its reputation during the global financial crisis.
“As our action today makes clear, when a major bank brazenly games some of the world’s most important financial benchmarks, the CFTC will respond with the full force of its authority,” said David Meister, the CFTC’s Director of Enforcement. “The American public, as well as people and companies around the globe, rely on interest rate benchmarks every day for mortgages, loans and other transactions, trusting that the underlying benchmark rates are honest. Market integrity is seriously compromised where, as here, a bank spins its rate submissions to boost trading profits, pays off a network of brokers to disseminate false rate information, or makes false submissions to protect its reputation.”
According to the Order, from at least 2005 to at least 2010, UBS engaged in two overarching courses of unlawful conduct that undermined the integrity of the London Interbank Offered Rate (“LIBOR”), the Euro Interbank Offered Rate (“Euribor”), the Euroyen Tokyo Interbank Offered Rate (“Euroyen TIBOR”), and other interest rate benchmarks. Each of these benchmarks is supposed to reflect or relate to the true costs of borrowing unsecured funds in the relevant interbank market, and as demonstrated by the CFTC’s Order, during the relevant period, UBS’s submissions for these benchmark interest rates often did not.
Specifically, today’s enforcement action states:
- From at least January 2005 to at least June 2010, acting through more than three dozen employees around the world including a number of senior managers, UBS attempted to manipulate these benchmarks in UBS’s favor, to enhance the profits the Bank earned from trading benchmark-based derivatives. UBS regularly, and for certain benchmarks sometimes daily, made false rate submissions. Moreover, with respect to Yen LIBOR and Euroyen TIBOR, UBS colluded with at least four other panel banks to make false submissions, and induced at least five interdealer brokers to disseminate false information or otherwise influence other panel banks’ submissions. The Order also finds that UBS sometimes successfully manipulated the official fixing of Yen LIBOR.
- From August 2007 through mid-2009, during the global financial crisis, UBS managers directed that the Bank’s U.S. Dollar LIBOR and certain other submissions be tailored to protect the Bank’s reputation and avoid what it perceived to be unfair speculation about its fundraising ability and creditworthiness. The first wrongful direction was for the submissions to “err on the low side.” Later, the directions were revised to place UBS in “the middle of the pack” of panel bank submissions. According to the Order, these directions, at times, caused UBS’s U.S. Dollar LIBOR and other benchmark submissions to be knowingly false.
UBS engaged in all of this misconduct even after it was on notice in October 2008 of the CFTC’s investigation of UBS. The Order finds that the conduct came to light only after UBS began an internal inquiry upon the request of the CFTC in April 2010. The unlawful conduct by UBS is described in more detail below. Attached to this release are excerpts of quotations from the numerous UBS communications evidencing the unlawful conduct.
Manipulative Conduct For Profit
As detailed in the Order, from at least January 2005 through at least June 2010, UBS routinely skewed its submissions for Yen, Swiss Franc, Sterling and Euro LIBOR, Euribor, and, at times, Euroyen TIBOR, to benefit UBS’s derivatives trading positions that were tied to those particular benchmarks. This unlawful conduct involved more than three dozen traders and submitters located in many offices, from London to Zurich to Tokyo, and elsewhere. Several UBS managers participated in or knew that this was a routine practice of the traders, and did nothing to stop it.
According to the Order, UBS’s interest rate submissions were determined by inherently conflicted UBS derivatives traders, who, not only determined the rates to submit, but also traded derivatives for UBS’s profit based on the same benchmarks. The Order finds that, in deciding what rates to submit, these traders often took into consideration how their trading positions might benefit, and also routinely accommodated requests of other UBS derivatives traders to make similarly beneficial submissions.
The Senior Yen Trader and Interdealer Brokers
The Order sets forth the particularly extensive unlawful activity of one UBS senior Yen trader (“Senior Yen Trader”), known as one of the most significant traders in the Yen market, who generated hundreds of millions of dollars in trading revenue for UBS. The Senior Yen Trader orchestrated a massive, multi-year course of conduct to manipulate Yen LIBOR almost daily at times, and Euroyen TIBOR less frequently. In three years, the Senior Yen Trader, along with other UBS employees made approximately 2000 requests by email or in written chats alone, to manipulate Yen LIBOR, accounting for 75% of the days in which Yen LIBOR submissions were made by UBS during that period. At times, the Senior Yen Trader conducted sustained manipulative operations for weeks to move Yen LIBOR in the direction he needed; these operations were given names such as “the Turn Campaign” and “Operation 6m.”
The Senior Yen Trader used at least three manipulative strategies: (i) he wrongfully induced at least five interdealer brokers to assist with his manipulative scheme; (ii) he had UBS submitters make submissions reflecting his preferred rates; and (iii) he cultivated prior working relationships and friendships with derivatives traders from at least four other banks and had them make requests of their banks’ own Yen LIBOR submitters based on his preferred rates.
With respect to interdealer brokers, who act as intermediates to cash and derivatives transactions for their bank clients, the Order finds that the Senior Yen Trader induced such brokers to employ various unlawful methods tailored to drive the submissions of other panel banks to achieve the rates that would benefit the Senior Yen Trader’s derivatives positions. Thus, from late 2006 to late 2009, he made requests of interdealer brokers to: (i) disseminate false “run-throughs” of suggested Yen LIBOR to panel bank submitters, whom a broker once referred to as “sheep” following the information; (ii) contact other panel bank submitters to influence their submissions; (iii) publish false market cash rates on dedicated electronic screens available to the brokers’ bank clients; and (iv) “spoof,” i.e., make fake bids and offers, to influence submissions of other panel bank submitters. To secure the cooperation of interdealer brokers, the Senior Yen Trader took steps to make sure the brokers were compensated, or sometimes threatened to steer his business away from them. The compensation took the form of additional trades or even wash trades that generated broker commissions, and certain individuals at one broker received approximately $216,000 from UBS in paid fees/bonuses, which were shared over approximately two years in return for their unlawful assistance.
According to the Order, in making requests of UBS submitters for beneficial submissions, the Senior Yen Trader was sometimes careful not to cause a conflict with trading positions held by the UBS Yen submitters who were helping him. He sometimes reconciled conflicts by executing transactions to offset any negative impact on the submitters’ positions. This was all to make sure that the UBS employees involved with the scheme, as one submitter commented, were “one happy family.”
Management Directions to Protect UBS’s Reputation Caused False Submissions
As set forth in the Order, with the onset of the global financial crisis, the media focused on the financial well-being of the world’s major financial institutions and analyzed LIBOR submissions, among other market indicators, to ascertain a panel bank’s strength and ability to borrow funds. Questions arose in the media about the integrity of the panel banks’ submissions. In response, from early August 2007 to at least mid-2009, certain managers in UBS Group Treasury and Asset and Liability Management (“ALM”) issued directions to UBS’s submitters to tailor UBS benchmark interest rate submissions to ward off negative public and media perceptions about UBS. These directions, at times, resulted in false submissions for U.S. Dollar LIBOR, LIBORs for other currencies, Euribor, and Euroyen TIBOR, because the submissions did not solely reflect UBS’s assessment of the borrowing costs of unsecured funds in the relevant interbank markets, as required.
At first, in August 2007, the management directions were to “err on the low side” of panel bank submissions. UBS’s U.S. Dollar LIBOR submissions immediately moved to the lowest quartile of panel submissions and remained there for a sustained period. UBS continued to make low submissions that suggested it could borrow at such low rates even though at the same time it was suffering from negative credit events such as reporting negative revenues in October 2007, a significant write down of assets in December 2007, losses in the first quarter of 2008, and a credit rating downgrade. As one senior UBS employee commented at the time, “senior management want to show the world we are the strongest bank with loads of liquidity.”
In April 2008, after the Wall Street Journal questioned the integrity of low submissions by the panel banks, such as UBS, managers in Group Treasury and ALM directed that UBS’s submissions be made “in the middle of the pack” of panel banks submissions. That direction was followed and, at times, enforced, notwithstanding disagreement or resistance on some occasions by the submitters. From June 2008 through at least the first half of 2009, UBS’s submissions were in the “middle of the pack” virtually every day, even after events suggesting that the submissions should have been higher, such as UBS’s receipt of more than $125 billion in infusions and loans from the Swiss government and the Swiss National Bank, and from liquidity programs of the U.S. Federal Reserve Bank, and the Bank’s $7.59 billion loss in the fourth quarter of 2008.
UBS’s Obligations to Ensure Integrity and Reliability of Benchmark Interest Rates
In addition to the $700 million penalty, the CFTC Order requires UBS to implement measures to ensure that its submissions are transaction-focused, based upon a rigorous and honest assessment of information, and not influenced by conflicts of interest. See pages 60-73 of the CFTC’s Order. Among other things, the Order requires UBS to:
- Make its submissions based on certain specified factors, with UBS’s transactions being given the greatest weight, subject to certain specified adjustments and considerations;
- Implement firewalls to prevent improper communications including between traders and submitters;
- Prepare and retain certain documents concerning submissions, and retain relevant communications;
- Implement auditing, monitoring and training measures concerning its submissions and related processes;
- Make regular reports to the CFTC concerning compliance with the terms of the Order;
- Use best efforts to encourage the development of rigorous standards for benchmark interest rates; and
- Continue to cooperate with the CFTC.
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The CFTC Order also recognizes the cooperation of UBS with the Division of Enforcement in its investigation, as of late December 2010.
In related matters concerning the U.S. Justice Department, UBS Securities Japan Co., Ltd., agreed to plead guilty to a criminal charge of wire fraud, UBS AG agreed pursuant to a non-prosecution agreement to continue to cooperate with the Justice Department, and UBS AG and UBS Securities Japan Co., Ltd. agreed to make payments that when combined total $500 million. In addition, the United Kingdom’s Financial Services Authority (“FSA”) issued a Final Notice regarding its enforcement action against UBS AG and has imposed a penalty of £160 million, the equivalent of $259.2 million, against the Bank; the Swiss Financial Market Authority (“FINMA”) issued an order resolving proceedings against UBS AG and requiring disgorgement of 59 million Swiss Francs, the equivalent of $64.3 million.
The CFTC thanks and acknowledges the valuable assistance of U.S. law enforcement and regulatory authorities, the U.S. Department of Justice, the U.S. Securities and Exchange Commission, and the Washington Field Office of the Federal Bureau of Investigation, as well as the CFTC’s foreign counterparts in this matter ─ the FSA, FINMA, and the Japanese Financial Services Agency.
CFTC Division of Enforcement staff members responsible for this case are Philip P. Tumminio, Anne M. Termine, Rishi K. Gupta, Jonathan K. Huth, Timothy M. Kirby, Aimée Latimer-Zayets, Terry Mayo, Brian G. Mulherin, Elizabeth Padgett, Maura M. Viehmeyer, Jason Wright, Gretchen L. Lowe, and Vincent A. McGonagle. CFTC Staff from the Division of Market Oversight and Office of the Chief Economist also assisted with the investigation of this matter.