Libor, which stands for London Interbank Offered Rate, tracks the average interest rates banks pay to borrow money from each other. The interest rates of trillions of pounds of mortgages and commercial loans are linked to Libor. Every day, a member of staff at each of 16 banks - the submitter - would state what interest rate they thought their bank would have to pay to borrow cash from another bank. An average would be taken and published.
At the same time, banks had large positions - investments that could gain or lose money if Libor moved up or down. Traders in charge of supervising those investments have frequently made requests of Libor submitters - asking them to tweak their bank's estimates of the interest it would pay up or down by a hundredth of a percentage point or two. Banking regulators have brought four trials for Libor rigging and levied billions of pounds in fines against banks for the requests, claiming they were dishonestly seeking to nudge the Libor average in their favour, motivated by greed.
Practices for which some traders have been prosecuted, jailed or banned were company policy at the Swiss bank UBS and its staff were expected to take into account the bank's commercial interests when setting the benchmark Libor rate.
The Financial Conduct Authority announced in June 2016 that it was banning Arif Hussein, claiming he knowingly or recklessly engaged in behaviour which was improper. Lawyers for Hussein said there was evidence to show bosses directed staff to do precisely that as part of best commercial practice - and that Hussein, a junior trader at the bank, was, in fact, doing as instructed. "He was doing precisely what he believed he was expected to do. There is no hint of subterfuge or dishonesty. This is a man who was doing his job diligently down to the very last minute." Hussein had no reason to think it was dishonest. Instead, asking for a higher or lower Libor, within a range of interest rates at which the bank might borrow, was normal, endorsed by their bosses and regarded as best practice. They cited evidence which they said showed that informing Libor submitters of the bank's trading positions was condoned and encouraged by UBS bosses on commercial grounds.
An email between UBS's top Libor expert and Hussein's colleague, Pete Koutsogiannis, and senior UBS Treasury manager Gaspare Lasala, in which it is made clear that taking into account the bank's trading positions and profits is normally a priority.
"The FCA]has failed to explain how a very junior trader, who had no other experience of financial services, no training, no guidance and no possible means of benefitting from a practice, should have known in 2008 and 2009 that it was obviously wrong for trading positions to be factored into Libor submissions."
It's all coming out in the wash.
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