Washington, DC – 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.
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.
* * * *
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.
