Washington, DC – Lloyds Banking Group and Lloyds Bank have been ordered by the U.S. Commodity Futures Trading Commission (CFTC) to pay a substantial $105 million penalty. This action comes as a settlement for charges related to the manipulation, attempted manipulation, and false reporting of the London Interbank Offered Rate (LIBOR). The misconduct was perpetrated by employees of Lloyds TSB Bank plc (Lloyds TSB) and HBOS plc (HBOS), the latter being acquired by Lloyds Banking Group in January 2009.
The CFTC order reveals that Lloyds TSB successfully manipulated Sterling and Yen LIBOR in certain instances. Furthermore, the regulator found that Lloyds TSB aided and abetted Rabobank derivatives traders in their attempts to manipulate Yen LIBOR. Beyond the monetary penalty, Lloyds Banking Group and Lloyds Bank are mandated to cease and desist from violating the Commodity Exchange Act. They must also implement stringent measures to safeguard the integrity of LIBOR submissions going forward.
Aitan Goelman, CFTC Director of Enforcement, stated, “Lloyds is being held accountable for serious misconduct through today’s action.” He emphasized the CFTC’s dedication to “taking all actions necessary to ensure the integrity of the markets we oversee.”
The actions of Lloyds Banking Group, through its Lloyds TSB and HBOS entities, undermined LIBOR’s integrity. LIBOR is a crucial global benchmark interest rate underpinning trillions of dollars in financial instruments. The CFTC’s findings highlight that Lloyds Banking Group sought to manipulate LIBOR, sometimes successfully, to benefit its trading positions in both cash and derivatives markets. Adding to the severity, HBOS deliberately altered and lowered its Sterling and U.S. Dollar LIBOR submissions to project a healthier financial image during its acquisition by Lloyds Banking Group.
Image of scales of justice
This regulatory action is part of a broader crackdown on LIBOR manipulation. In a parallel legal move, the U.S. Department of Justice (DOJ) reached a deferred prosecution agreement with Lloyds Banking Group. This agreement defers criminal wire fraud charges, contingent on Lloyds Banking Group’s continued cooperation and payment of an $86 million penalty. Adding to the global repercussions, the UK Financial Conduct Authority (FCA) also took enforcement action, issuing a Final Notice against Lloyds Bank and Bank of Scotland plc (an HBOS subsidiary). The FCA imposed a combined penalty of £105 million, equivalent to approximately $179 million.
Key Findings of the CFTC Order
The CFTC Order details several key aspects of the misconduct:
- Pre-Acquisition Manipulation: Before Lloyds Banking Group acquired HBOS in January 2009, LIBOR submitters at both Lloyds TSB and HBOS independently manipulated Sterling and U.S. Dollar LIBOR submissions. This was done to favor their own and their traders’ cash and derivatives trading positions.
- Post-Merger Coordination: Following the merger, submitters from the now-combined entities, though in separate offices, coordinated their LIBOR submissions. This coordination aimed to benefit their collective trading positions.
- Yen LIBOR Collusion with Rabobank: From around mid-2006 to October 2008, the Lloyds TSB Yen LIBOR submitter engaged in collusion with the Yen LIBOR submitter at Rabobank. They adjusted their Yen LIBOR submissions in concert to benefit the trading positions of both Lloyds TSB and Rabobank.
- Crisis-Era Reputation Management: During the 2008 financial crisis, HBOS, through its submitters and a manager, improperly altered and lowered its Sterling and U.S. Dollar LIBOR submissions. This was a deliberate attempt to create a false market perception of HBOS’s financial stability amidst the turmoil of the acquisition. The HBOS manager instructed submitters to align their LIBOR submissions with expected published rates, avoiding appearing as a financially distressed outlier. Consequently, HBOS’s submissions failed to reflect an honest assessment of its interbank borrowing costs and deviated from the British Bankers’ Association (BBA) LIBOR definition.
- Attempted Sterling LIBOR Manipulation in Cash Markets: In 2006, Lloyds TSB and HBOS submitters occasionally inflated their bids for Sterling in the cash market. This was a direct attempt to artificially inflate the published Sterling LIBOR fixing, aiming to benefit specific trading positions linked to Sterling LIBOR.
Image of the Lloyds Banking Group logo
The CFTC Order acknowledged the cooperation extended by Lloyds Banking Group and Lloyds Bank during the Division of Enforcement’s investigation. The CFTC also expressed gratitude for the significant assistance provided by the DOJ, the FBI’s Washington Field Office, and the FCA.
The CFTC’s investigation was conducted by a team from the Division of Enforcement, highlighting the multi-agency and international nature of the crackdown on LIBOR manipulation.
This action against Lloyds Banking Group is part of a series of penalties imposed by the CFTC, totaling over $1.87 billion, against various entities for manipulative conduct related to LIBOR and other benchmark interest rates. Previous cases include penalties against RP Martin Holdings Limited, Martin Brokers (UK) Ltd., Rabobank, ICAP Europe Limited, The Royal Bank of Scotland plc, RBS Securities Japan Limited, UBS AG, UBS Securities Japan Co., Ltd., Barclays PLC, Barclays Bank PLC, and Barclays Capital Inc. In each of these cases, the CFTC mandated specific measures to ensure the integrity and reliability of benchmark interest rates.
Examples of Misconduct in Communications
The CFTC order includes excerpts from internal communications that vividly illustrate the misconduct. These examples are categorized by the type of LIBOR and the nature of the manipulation:
Requests for Skewed Sterling LIBOR Submissions:
- March 6, 2009: A former HBOS Sterling Submitter explicitly requests a lower 1-month LIBOR fixing from a Lloyds TSB Sterling Submitter to benefit a trading position. The conversation details the coordination and agreement to manipulate the rate.
- March 31, 2009: Another exchange shows a former HBOS Sterling Submitter requesting a higher 3-month LIBOR to benefit a large reset, with the Lloyds TSB Submitter agreeing to fix it higher, citing month-end loan activity as justification.
- April 1, 2009: A Lloyds TSB Junior Trader directly asks if a higher or lower LIBOR is desired, with the former HBOS Sterling Submitter requesting low for 1-month and high for 3-month LIBOR fixings based on their trading book positions.
Requests for Skewed U.S. Dollar LIBOR Submissions:
- January 17, 2008: An HBOS Trader directly requests a higher 3-month USD LIBOR.
- May 11, 2009: A former HBOS U.S. Dollar Submitter suggests coordinating LIBOR inputs to suit trading books, mentioning an upcoming large liability reset and the need for a low submission.
- May 19, 2009: A Lloyds TSB U.S. Dollar Submitter confirms to a former HBOS counterpart that they “got the LIBORs down” as requested.
Collusion Between Lloyds TSB and Rabobank Yen LIBOR Submitters:
- June 27, 2006: The Rabobank Yen Submitter informs Lloyds TSB of a need for a high 1-month LIBOR and gets a commitment of cooperation.
- July 27, 2006: Another instance of the Rabobank Yen Submitter signaling a need for a high 1-month fix, with Lloyds TSB confirming their willingness to “oblige.”
- March 19, 2008: The Rabobank Yen Submitter relays a senior trader’s request for a high 6-month LIBOR, which the Lloyds TSB submitter exceeds, boasting about the high submission.
- March 28, 2008: Rabobank indicates they need to set higher LIBORs, and Lloyds TSB acknowledges they need them lower on that day, indicating an understanding and awareness of each other’s positions.
- June 27, 2006: Lloyds TSB initiates a request for a higher 3-month LIBOR from Rabobank, which is readily agreed upon.
- July 19, 2007: Lloyds TSB requests a low 3-month LIBOR from Rabobank, specifying the desired level.
- January 7, 2008: Lloyds TSB explicitly asks for a “nice high 1m libby,” and Rabobank confirms setting a high rate and offers to go even higher.
Communications Regarding HBOS Lowering LIBOR Submissions for Reputation:
- May 6, 2008: An HBOS Senior Manager stresses the importance of not being an outlier in LIBOR submissions, highlighting the reputational risk.
- August 8, 2008: A senior manager warns that high borrowing rates could create the impression of HBOS being a “desperate borrower,” leading to a withdrawal of wholesale lines.
- September 26, 2008: The HBOS U.S. Dollar LIBOR Submitter confides to another financial institution employee about pressure from senior management to lower rates to align with others.
- October 21, 2008: An HBOS LIBOR Supervisor instructs submitters to avoid being an outlier in BBA submissions due to potential issues with investors.
- October 30, 2008: The HBOS LIBOR Supervisor directs submitters to keep submissions at or slightly above deposit rates.
Conclusion
The CFTC’s action against Lloyds Banking Group underscores the severity with which regulators worldwide are addressing LIBOR manipulation. The substantial penalties, coupled with the required undertakings, aim to deter future misconduct and reinforce the integrity of critical financial benchmarks. For Lloyds Banking Group, this settlement marks a significant step in resolving past issues, but also serves as a stark reminder of the importance of ethical conduct and robust control systems within the banking industry. The detailed communications revealed in the CFTC order provide a granular view into the mechanics of LIBOR manipulation and the collusive practices employed, offering valuable lessons for regulatory compliance and risk management within financial institutions.
