ISDAfix benchmark reference.

The International Swaps and Derivatives Association, Inc., website at said the ISDAfix is “the leading benchmark for annual swap rates for swap transactions worldwide.” Bloomberg*’s April 2013 article called ISDAfix “a benchmark in the $379 trillion market for interest rate swaps, which corporations and governments use to fine-tune their borrowing costs.” Süddeutsche Zeitung’s August 2013 estimate was that a $450 trillion market was affected by this benchmark. A* Jan. 2014 market estimate was even higher: “The organization’s ISDAfix benchmark is an important reference point underlying contracts in the $630 trillion derivatives market, and ICAP collects data for the U.S. dollar-denominated part of it.”

The data used to set the US$ section of the ISDAfix benchmark were provided by thirteen banks to the New Jersey office of a U.K. broker or “intermediary trader” known as ICAP. U.K. financial data company Thomson Reuters* calculated the benchmark prices from ICAP’s banks’ data for the US$ section and from data it collected directly from banks for the other currencies. ICAP published its ISDAfix benchmark prices on a Reuters page every morning at 11 a.m. and updated them throughout the day based on reported transactions. ICAP’s data entry was not automated.

The S.Z. said Germany’s BaFin finance regulator started investigating ISDAfix fixing after Bloomberg reported that the U.S.A.’s Commodity Futures Trading Commission financial regulator was investigating perhaps fifteen banks and about a dozen current and former ICAP traders for possible pricing collusion.

Background from Bloomberg

“In their simplest form, swaps are used by investors to exchange a fixed interest rate for a floating one, or vice versa. They also come in profoundly more complicated flavors, and altogether they constitute more than half of the $639 trillion global derivatives market. ISDAfix, used by traders to settle contracts and value positions, is commonly found in hybrid securities known as structured notes that are popular with wealthy investors. While they affect everything from pension annuities to commercial real estate investments, ISDAfix rates are esoteric even by the standards of structured finance. …

“…Banks could earn millions by persuading ICAP brokers to delay their manual entry of data. Publishing stale prices can boost profits for banks dramatically. On a $500 million swap that matures in 20 years, for example, a delay that prevents the instrument from moving one basis point (0.01 percent) equals $1 million in profit for the dealer. […Also, ICAP’s] brokers match dealers by phone, then enter transactions into the 19901 screen by hand. The firm is paid commissions based on the size of the trades it matches.” described a 2010 article saying that “prices capable of influencing Isdafix through the rate-setting process sometimes appeared to move in ways beneficial to a handful of banks.”

The ICAP brokerage was also hired to execute many ISDAfix-related trades for reasons that could have included exerting extra influence on ICAP-mediated benchmarks, said an online article from Rupert Murdoch’s Wall Street Journal*.

A 25 Sep 2013 article seemed to indicate that brokers were particularly able to game off-market trading price benchmarks, particularly in slow economic times when those relying on brokers’ reported pricing data had fewer sales of their own to glean comparable pricing data from. “To promote market integrity, it is critical that benchmark interest rates be anchored in observable transactions,” said C.F.T.C. chair Gary Gensler in 2013.

Update on 26 Sep 2013: ICAP was fined £55 million “for control failures that allowed employees to engage in Libor rigging” said an online Financial Times article. After admitting L.I.B.O.R. control failures, which the U.K.’s Financial Conduct Authority also called a poor compliance culture, the huge brokerage firm argued against reducing its ISDAfix role, saying that would give undue influence to the banks submitting ISDAfix pricing data. ICAP, the world’s largest broker for interbank transactions, couldn’t have been gaming the ISDAfix benchmark’s timing because people would have noticed, ICAP said.

Update on 26 Jan 2014: It was announced that ICAP was to be removed from its middleman role in ISDAfix, which was to be restructured so that banks would submit US$ pricing data to Thomson Reuters directly, said Rupert Murdoch’s Thomson Reuters has been collecting the non-US$ ISDAfix data directly from banks for years, said, but the US$ data from ICAP for >15 years: “[ICAP] had been providing ‘snapshots’ using transaction-based information from its BrokerTec platform in addition to information from recent deals, the second source said, but the process would now return purely to a poll of participating banks.” Apparently the snapshots involved removing some outliers and averaging the data. ICAP said, “We appreciate ISDA’s interest in having a consistent polling process across each of the relevant currencies and fixings.”

ISDA said moving ISDAfix pricing data for all currencies to Reuters is a first step toward their goal of defining the benchmark based on actual trades (“live prices from trading venues” said, not just data submitted by banks. The new system will also be automated: “The second stage will be the move to an automated, market-based ISDAfix rate setting process, which is expected to begin in the second quarter of 2014,” said an ISDA spokesperson. ISDA said they will create a code of conduct and oversight committee for the benchmark.

ICAP’s C.E.O. Michael Spencer helped create the ISDAfix benchmark fifteen years ago. Reporting on the ISDAfix benchmark described ISDA as the benchmark’s “overseer” and as a lobbying group.

Update on 09 Mar 2014: Thomson Reuters has been granted U.K. regulatory approval to create a benchmark services subsidiary to handle the ~160 benchmarks the company helps calculate, including L.I.B.O.R. International benchmark regulations are about to be tightened this summer, according to a letter sent last summer by the International Organization of Securities Commissions (“a global body of central banks. They include oversight of third parties and policies for managing conflicts of interest” – warning companies they had one year before new stricter rules. “Administrators of financial market benchmarks have to prove by the July deadline that they have improved systems for monitoring submitted figures,” said

* The U.K.’s Reuters press agency was reporting on financial news related to the ISDAfix and it belongs to Thomson Reuters (since the Canadian Thomson Corp. bought Reuters in 2008). The parent company of Bloomberg News “competes with ICAP in some businesses, including foreign-exchange and swaps trading, and with Thomson Reuters in providing financial news and data” according to their disclaimer in an ISDAfix article. Rupert Murdoch’s News Corp. owns the Wall Street Journal and owned Dow Jones from 2007 to 2010, when it sold it to the C.M.E., Chicago Mercantile Exchange/Chicago Board of Trade group.

(EESS dah feex   ref ah R-R-RENTS veaht.)

Untreue wegen mangelndes Risikomanagement

Breach of trust due to inadequate risk management.

The entire former management board of northern German bank HSH Nordbank is on trial in Hamburg for approving a deal in 2007 allegedly without sufficiently informing themselves first (“bullwhipping it through in only three days right before Christmas” on the basis of a memo that did not contain the data required by due diligence, so the prosecutors). This is the first time an entire bank board has been put on trial in Germany, but it presumably won’t be the last.

In 2007, to avoid receiving a lower rating from the Wall Street ratings agencies one year before the bank’s scheduled stock market launch, prosecutors said, HSH Nordbank moved a collateralized debt obligation package that included risky real estate and commodities paper “away” into an entity called Omega 55, for which the French bank BNP Paribas guaranteed. In return, HSH guaranteed when BNP Paribas moved risky paper, valued at 2.4 billion euros and including Iceland government bonds from Lehman Brothers, into the Omega 55 entity [Zweckgesellschaft, “special-purpose vehicle” according to]. HSH’s guarantees for BNP Paribas securities ended up costing HSH >150 million euros in 2008; ultimately in the course of the global financial crisis the bank had to be bailed out by 30 billion euros that included taxpayer money from its majority owners, the German states of Schleswig-Holstein and Hamburg, and taxpayer money from the German bank bailout funds BaFin and SoFFin. Omega 55’s losses were in part kept off the bank’s books, which is why two of the six former HSH board members are further going to be tried for balance sheet falsification [Bilanzfälschung, “false accounting” according to]. Guilty verdicts in the breach of trust trial could also result in a civil lawsuit from HSH against its former managers.

Update on 23 Jul 2013: reported that charges were also brought against managers from Bayerische Landesbank (BayernLB), Sachsen LB and Landesbank Baden-Württemberg, but these cases have not yet gone to trial.

Update on 16 Dec 2013: HSH Nordbank has been accused of dividend stripping.

Update on 28 May 2014: Hamburg prosecutors are asking for probation and fines of up to 150,000 euros, after they reduced their estimate of damage done to the bank from ~150 million euros to ˜50 million. This is in the breach of trust trial, for signing off on what was a “circular transaction” in 2007, without questioning inconsistencies in the information presented to them.

Update on 09 Jul 2014: The entire former management board of HSH Nordbank was found innocent. Dubious deeds and dereliction of duty, said the judge from the Economic Crimes Court [Wirtschaftsstrafkammer], but he didn’t think there was enough evidence to prove serious dereliction of duty. Also there’s no evidence that the HSH Nordbankers profited financially from the damage they caused. Trials against managers from IKB and the Baden-Württemberg Landesbank for their risk management before the global financial crisis have also been canceled, said At the time, what those bankers did was neither illegal nor unusual.

The states of Hamburg and Schleswig-Holstein had to pump 13 billion euros into HSH Nordbank to bail it out.

Update on 10 Jul 2014: The judge gave the prosecutors the option of appealing this decision, and they will appeal it to the supreme court in Karlsruhe.

(OON troy ah   vague en   MON geln dess   REESE ee co men edge ment.)

Kapitalverschleierung über Steueroasen

“Using tax oases to veil capital.” Methods for doing this were disclosed by financial data about 130,000 people, in 170 countries, >120,000 “mailbox companies,” >260 GB in >2 million documents from a time range of ~30 years sent anonymously to the International Consortium of Investigative Journalists over a year ago. The story hit the world press on 04 Apr 2013. Greek and Filipino tax authorities announced that they will be investigating. The vice president of Mongolia‘s parliament will probably have to resign. Some of the still-legal methods to create tax opacity to be gleaned from the data were shown to have been used by the Deutsche Bank in Singapore, which had an intermediary agent (Trustverwaltungsfirma, “trust administrator company”) create >300 companies in so-called tax paradises (Steuerparadise).

In response: Gerhard Schick (Green Party) suggested Germany follow France’s example of levying an additional tax on all transactions with low-tax countries, disincentivizing tax flight (Steuerflucht) by neutralizing the advantages. Joachim Poß (SPD) proposed “an international anonymous NGO and a comprehensive information exchange, starting here in Europe.” The Leftists party proposed following the USA’s example of linking tax obligations to citizenship, so that every German residing abroad would be obligated to report “their total income every year, how much property they owned in total and what taxes they had had to pay for that in the Seychelles that year. And the difference between that and their German tax obligation” would then have to be paid in Germany, said Gregor Gysi (Die Linken).

The Süddeutsche Zeitung reported that they and NDR were the two German media outlets given access to the data (of “the biggest leak in world history”), and furthermore that a representative of Finance Minister Wolfgang Schäuble requested access to the data on Thursday, 04 Apr 2013, but the SZ would not grant that request. The data were protected under freedom of the press (Pressefreiheit), which includes protecting one’s sources, the Süddeutsche wrote. Sharing the data with government authorities might endanger those sources and obstruct the SZ’s ongoing research. NDR also refused the request to share the data. Now Focus magazine seems to have acquired the data somehow.

Update on 06 Apr 2013: “I have a certain degree of pleasure from the fact that this public scandalization in all countries has very much increased the pressure,” said German finance minister Wolfgang Schäuble with quiet satisfaction on 05 Apr 2013. “And now we have better chances to make progress faster than was possible in the past.”

Critics say the German finance minister has to be kidding because everyone’s known about this for years. If Schäuble were serious, they say, his office would be drafting new legislation. Income tax is regulated state-by-state in Germany, for example, and some people are calling for it to be centralized, made into a uniform federal-level taxation system with fewer “tax bait” niches. The OECD seems to be the locus for international negotiations in response to the new information; that group wants to issue a list of proposed actions in response to the “Offshore Leaks” data trove by July 2013.

(Cop ee TALL fer SHLY er oong   üüüberrr   SHTOY er oh OZ en.)


German Federal Financial Supervisory Authority,” which announced that it will be checking the bonuses paid by banks in Germany. “We think it’s important to verify whether banks are in fact complying with the laws’ requirements. Because checking bonuses and salaries is an important instrument for countering undesirable developments in the banking system.” The ruling coalition welcomes this because the announcement itself should cause better compliance with existing banking regulations. The SPD, which is in the opposition, says it’s not enough and that in this election year they will fight for stricter new laws and for radical limits to be set for banker remuneration.


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