CFTC on the Hunt for Market Manipulation Cases

Earlier this week, Barclays Chairman Marcus Agius resigned due to accusations that Barclays was participating in LIBOR rate manipulation.

Apparently, some of Barclays’ traders tried to manipulate the London Interbank Offered Rate (Libor). Recall that LIBOR is the rate that banks quote when they do business with each other. It is the reference rate used for about 350 TRILLION USD worth of derivatives, comprised of a wide range of financial products that include currency swaps and loan agreements.

According to these traders, they assumed that they had been granted permission from higher-level executives to post artificially low LIBOR rates from late 2007 to mid-2009. Moreover, Barclays employees admitted doing so because they thought rival banks were doing the same! Talk about a lack of corporate supervision!

As it turns out, Barclays was already in hot water for this very issue as early as 2007. Bankers and traders had sent in their complaints to the Fed and the Bank of England, but only the U.S. Commodity Futures Trading Commission (CFTC) stepped up to the plate and began its own investigation in 2008. By spring 2010, the CFTC felt that it had enough evidence of market manipulation and was finally able to bring the case to the U.K. Financial Services Authority (FSA).

After a thorough and comprehensive investigation, Barclays decided to settle and must now pay a fine of 453 million USD.

And this may only be the beginning. Word on the street is that financial regulators have set their sights on about another dozen banks on charges of market manipulation, a list that includes UBS, RBA, and Citigroup.

However, several critics are quick to point out that this is a bigger ethical problem instead of a mere compliance issue that can be resolved by regulatory agencies. The CFTC and FSA, with the help of the U.S. Securities and Exchange Commission (SEC) are starting to uncover a deeper-rooted issue in the financial sector which could eventually boil down to the loss of trust in the entire industry.

Come to think of it, Barclays isn’t the only financial institution to mislead investors and betray public trust recently. During the first half of this year, MF Global’s collapse led to an investigation about the disappearance of 1.2 billion USD in client funds which were reportedly misappropriated in bad bets.

At the end of the day, we have regulatory agencies to thank for being at the forefront of cleaning up the industry and making sure that investor rights are protected. As I mentioned earlier, this is just the beginning of the widespread investigations that will be conducted among banks and across three continents.

It’s also good to note that other domestic agencies, such as the U.K.’s British Bankers Association (BBA), are helping industry watchdogs review the banking practices in their respective countries.

During times like these, it’s important for us traders to do our research and be aware of any market manipulation that might be taking place. You don’t want to be forking over your hard-earned money to a financial institution or a broker that is engaging in industry malpractice, now do you? Always remember, constant vigilance is a must!

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