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Banks in Trouble: ISDAfix Manipulation Charges on Board

Zacks Equity Research

The attempts of more than a dozen global banks to wriggle out of investor claims that accused them of rigging a benchmark used in the sales of interest-rate derivatives and other financial instruments, suffered a major setback after a federal judge in Manhattan rejected their bid to discard a private lawsuit yesterday.

In a 36-page ruling, U.S. District Judge Jesse Furman permitted investors led by several pension funds and municipalities to pursue antitrust and breach-of-contract claims over ISDAfix rigging from 2009 to 2012 against most defendants.

The Alaska Electrical Pension Fund and other investors raised “plausible allegations that a conspiracy among the defendants existed,” Furman said.

However, other claims were dismissed against defendants that include Bank of America Corporation BAC, Barclays PLC BCS, BNP Paribas SA BNPQY, Citigroup Inc. C, HSBC Holdings Plc HSBC, JPMorgan Chase & Co. JPM, Deutsche Bank AG DB, Credit Suisse Group AG CS, The Goldman Sachs Group, Inc. GS, Nomura Holdings, Inc. NMR, The Royal Bank of Scotland Group plc RBS, UBS AG UBS and Wells Fargo & Company WFC.

Even the U.K.-based ICAP Inc., the former administrator for ISDAfix rate, is a defendant.

The banks will have to face antitrust lawsuits alleging the banks’ manipulation of ISDAfix rates, a benchmark used to appraise interest rate derivatives, commercial real estate mortgages and structured debt securities.

Per the allegations, the banks colluded to rig ISDAfix rates by rapidly executing trades just before the rate was supposed to be determined and delaying the processing of trades until it was fixed. This allowed the banks to manipulate the payments made to investors on derivative trades. Such action adversely impacted trillions of dollars of financial instruments tied to ISDAfix rates.

According to Furman, “that sort of coordinated action in a supposedly competitive market is precisely the sort of anticompetitive behavior the antitrust laws were intended to prevent.”

Last year, Barclays had agreed to pay a penalty of £74.2 million ($115 million) to the U.S. Commodity Futures Trading Commission to settle ISDAfix manipulation charges.

Notably, several major banks have also been accused of manipulating the London Interbank Offered Rate (LIBOR). LIBOR is an important benchmark that financial institutions use to set interest rates in trillions of dollars worth of loans and investments.

Manipulation of benchmark interest rates by major financial institutions have triggered thorough investigations by regulatory bodies across Europe, Asia and America and claimed billions of dollars as settlements and fines. We look forward to the gradual resolution of such matters which will put to rest long-drawn investigations and bring reprieve to the banks. However, it is likely to come as a huge blow to their financials.

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