On Friday afternoon (14 June), the Monetary Authority of Singapore (MAS) announced that it had punished the Singapore offices of 20 banks, after its year-long investigation into the “rigging” of Singapore’s interbank lending rate (SIBOR) revealed that 133 currency traders at those banks had attempted to manipulate SIBOR and two other foreign exchange benchmarks from 2007 to 2011. For 16 of the 20 banks, this marks the first time they have been disciplined in relation to the rigging of interbank borrowing rates.

The punishment imposed

The punishment announced by the MAS is both novel and innovative. It has not fined any of the banks. This obviously contrasts with the substantial fines levied last year in America (by the Department of Justice and the Commodity Futures Trading Commission) and in England (by the Financial Services Authority – as it then was).

Instead, the MAS has ordered the banks concerned to deposit very substantial cash sums with the MAS for a period of at least one year, with the size of the deposit corresponding to the seriousness of the bank’s stated misconduct. Each of the three banks judged to have committed the most serious misconduct is required to deposit over S$1 billion (£500 million).

At the other end of the spectrum, each of the six banks judged to have committed the least serious misconduct is required to deposit between S$100 million (£50 million) and S$300 million (£150 million). Those sums will be held by the MAS, and the banks will not be paid any interest on them, for at least one year.

Approximately 75% of the 133 traders implicated in the misconduct are said to have resigned or been asked to leave their jobs; the remaining traders are said to be subject to disciplinary action.

Some implications for E&O and D&O insurers

The “rigging” of interbank borrowing rates, particularly LIBOR, has generated considerable attention in the worldwide media although, to date, it has not developed into a significant (let alone systemic) “claims” event for E&O or D&O insurers in any Asian jurisdiction. It is doubtful whether the MAS investigation into SIBOR, and the sanctions imposed on the banks, will change that notwithstanding the sums it has ordered the banks concerned to deposit are huge.

First, the MAS will be returning the sums deposited by each bank once it is satisfied that their internal controls and procedures have been improved sufficiently so as to prevent any future instances of manipulation of benchmarks. In the meantime, each bank will have to submit a report to the MAS every three months explaining the measures it has taken to strengthen its internal controls.

Therefore, the only financial “penalty” being imposed on the banks (at this stage) is the interest they will forfeit on the sums they deposit with the MAS; irrespective of currency, interest rates on deposits in Singapore (like elsewhere) are extremely low, often less than 1%, which (in effect) reduces the loss to the banks significantly.

Second, for now, it is hard to see the deposits (and associated loss of interest) as anything other than a regulatory penalty, which is usually carved out of the definition of “Loss” and/or specifically excluded from coverage under banks’ E&O Policies.

Third, at this stage, we do not anticipate the MAS investigation leading to civil claims in Singapore against those banks implicated in the scandal.

Going forward

Increased regulation of financial institutions is clearly on the way in Singapore. The MAS has stated that it will be introducing “new criminal and civil sanctions for manipulation of any financial benchmark”, although it has not yet said what those sanctions will be. The MAS has also stated that it will “subject the setting of key financial benchmarks to regulatory oversight”, although, again, it has not yet specified the nature of this oversight or the potential penalties for breaches.

Banks and their insurers should, therefore, watch this space for further announcements and brace themselves for insureds’ increased exposure to regulatory investigations in the meantime.

A further, bigger, issue which banks and their insurers should watch is whether the regulators in Hong Kong, and elsewhere in the world, follow suit. Regulators in Hong Kong, in particular, are flexing some muscle across a wide range of regulatory issues at the moment.