Until recently there has been relatively little press coverage about possible claims for manipulation of the ISDAfix (the leading global benchmark for annual swap rates for interest rate swap transactions). This is in sharp contrast to the extensive coverage of the LIBOR (London Interbank Offered Rate) manipulation scandal and the settlements and fines reached with the Financial Conduct Authority and other regulators as a result.
Investigations into possible ISDAfix manipulation have been under way for some time now in the UK and the USA where legal proceedings for manipulation of the rate have recently commenced. Whilst there are a number of similarities between LIBOR and ISDAfix, and the ways in which they have allegedly been manipulated, there are also some interesting differences.
What is ISDAfix?
The ISDAfix is a benchmark which reflects the average mid-market rate for interest rates in various currencies and at various maturities. The ISDAfix rate is used primarily to set the prices for the fixed value of interest rate swaps but can also be used to calculate prices for corporate bonds, options on swaps and to value asset portfolios, including pensions, as well as the break costs for early termination of swap agreements. The rate influences all derivatives contracts subject to the ISDA framework documentation (International Swaps and Derivatives Association) which amounts to trillions of dollars of derivative products per annum.
Calculation of the ISDAfix rate
The ISDAfix rates are calculated on the basis of submissions from a panel of banks which includes, among others, Barclays, RBS and UBS. At the time of the alleged manipulation, the panel banks would submit the rate at which they would buy a swap of a certain value to Thomson Reuters, or depending upon the currency, direct to the electronic broker ICAP. This occurred during the ‘polling window’ for submissions which opened at 11am each day. Once the window had closed, the submissions received from panel banks would be used to calculate that day's fix. The calculation was arrived at by removing the four lowest and highest submissions before averaging those remaining. It was the resulting average which became the official ISDAfix rate on a given day.
Comparison with the calculation of LIBOR
Although there are some obvious similarities between this calculation mechanism and that used to calculate LIBOR, there is a key difference – at the time of the alleged manipulation ICAP played a central role in the calculation of the ISDAfix which took into account executed swap trades and executable bids and offers relating to trades in certain currencies. LIBOR on the other hand is based solely on estimates provided by the panel banks.
It would therefore potentially be possible to manipulate the ISDAfix rate by executing a large number of transactions before the submission deadline and this is what some banks have been accused of doing. Banks have also been accused of asking ICAP to delay the publication of some rates in order to profit from the existing rate.
The motivations for manipulating the two benchmarks also differ. It appears that one of the reasons banks manipulated the LIBOR benchmark was to make them appear more financially stable than they were during the financial crisis. However, with ISDAfix it is alleged that the purpose behind the manipulation was to enhance profits for the banks, or to reduce their losses on interest rate swap transactions. This could have a direct negative effect for the counterparties to these transactions and lead to claims against the banks concerned.
Investigations by the regulators
It was reported in April 2013 that the US regulator, the Commodity Futures Trading Commission (CFTC), was investigating claims of ISDAfix manipulation and subpoenas were issued to a number of banks and ICAP, the broker which administered and brokered some of the transactions that established the benchmark rate. Later the same year, the FCA announced that it too would be investigating potential ISDAfix manipulation.
Details of the investigations are limited at the moment but in September 2014 a claim was issued in the USA by The Alaska Electrical Pension Fund against a number of banks and ICAP. The fund is claiming that the banks acted in collusion using online chat functions (much like the traders involved in LIBOR manipulation), to manipulate the ISDAfix rate and that this manipulation affected the derivative transactions of its investors between 2006 and 2014. The fund claims that banks often submitted identical numbers which was highly unlikely to have occured without some sort of collusion.
One category of claimants for ISDAfix manipulation are those who have significant investment sums tied to ISDAfix products as they are most likely to have been affected by the manipulations even if the manipulations themselves were small. Other possible claimants are counterparties to other transactions with the banks concerned, including counterparties to hedging agreements.
As with LIBOR, the likely grounds on which a claim might be brought are:
- Mis-selling : arguing that products linked to ISDAfix were mis-sold and alleging either the bank had a duty to advise on the product and failed to do so to the standard required, or at all; or the bank misrepresented or fraudulently misrepresented some aspect of the product during the sale process (in this case that the rate was honestly set and that the bank had no knowledge of manipulating); and/or
- Breach of contract : contending that there was an implied term in the contract that the rate would be set honestly and that the bank would not seek to manipulate it and that the bank breached this term.
Competition law claims
There is also the potential for claims for breach of EU competition law. With LIBOR, for instance, settlements have already been reached between the European Commission and some LIBOR panel banks in respect of the manipulation. The details of these settlements are likely to be available in 2015 and at that point it may become clearer whether competition claims could also be brought in relation to alleged ISDAfix manipulation.
Differences between ISDAfix and LIBOR claims
It may be easier to prove that manipulation of ISDAfix directly caused losses than it would be to prove losses in relation to LIBOR. The reason is that it is alleged that banks were manipulating the ISDAfix rates to boost their own profits or minimise losses, and that this had a detrimental financial impact on other parties to the contracts. As an example, manipulation of the ISDAfix rate upwards may have increased early termination costs on swap agreements to the improper benefit of the bank involved. With LIBOR manipulation, at least part of the motivation was to make the banks appear stronger, and sometimes the manipulation benefitted some counterparties financially (while causing a loss to others).