“I Think We Got Away with It”

This chapter examines the enforcement campaign against manipulation of interest rate and foreign exchange benchmarks by traders and other employees of global banks. After reviewing the history, functioning, and weaknesses of LIBOR, the world’s most important interest rate benchmark, the chapter relates how the banking industry, banking regulators, and central bankers responded ineffectively to signs of LIBOR manipulation that emerged in 2008. By contrast, robust enforcement actions spearheaded by the U.S. Department of Justice and the Commodities Futures Trading Commission, beginning with the Barclays case in 2012, attracted worldwide attention. They led directly to parliamentary investigations, leadership turnover at some banks, and significant domestic and international benchmark reforms, culminating with an industry-wide shift away from LIBOR toward more reliable indices. Likewise, the foreign exchange manipulation scandal and related prosecutions led to the adoption of international reforms. In both cases, several individuals were also charged criminally, most notably UBS trader Tom Hayes. By using its authority over global banks to protect the integrity of widely used financial benchmarks that have the characteristics of public goods, U.S. actions benefited users of these benchmarks around the world.

The Sword of Damocles: who controls HSBC in the aftermath of its deferred prosecution agreement with the United States Department of Justice?

HSBC has entered into a $1.92bn deferred prosecution with the Department of Justice in the United States to settle charges that the bank’s compliance systems and corporate governance controls had failed to prevent money laundering and sanctions violations on an industrial scale. The violations spanned the globe and demonstrated fundamental flaws with the bank’s business model. The article evaluates the terms of the settlement and explores the national and extra-territorial implications. It argues that the settlement, the largest ever imposed on a financial institution, marks a significant turning point in the use of criminal prosecution precisely because it occurred just as the still burgeoning London Interbank Offered Rate (Libor) manipulation scandal reaches a denouement.

ANTITRUST DAMAGES IN FINANCIAL MARKETS

I briefly review the standard regression methods used to estimate damages in antitrust actions, and I analyze how these would be applied to cases in financial markets. I consider applications to three different financial market cases. The first is the NASDAQ odd-eighths litigation, where existing antitrust methods closely resemble the analyses published in the academic literature on this issue. The second type of case is bond market antitrust litigation, where the expert faces an additional hurdle because they have to estimate bid-ask spreads. The third type of case is related to the LIBOR manipulation scandal. I analyzed why existing methods provide a poor fit for the LIBOR damage calculations. Lastly, I evaluate IPO issuance fees as an example of price clustering in financial markets that has not let to antitrust litigation.

Legal and Conduct Risk in the Financial Markets

This third edition on legal risk has been expanded to include much new material specifically on conduct risk. It has been updated to take into account developments in the law and professional standards concerning such risks and associated values in the context of the financial markets. Significant (and in some cases, endemic) conduct-related scandals, such as the widespread mis-selling of financial products and LIBOR manipulation, exposed by the financial crisis, have resulted in legal and regulatory change in equal measure (and profound effect) to that of the prudential and financial stability concerns captured in the second edition. Consequently this new edition fully examines the current approach to trust, ethics, and conduct within the broader framework of reputational and legal risk. In doing so, it clarifies what constitutes legal risk in contemporary financial markets and how to manage it, drawing on examples and case studies. Other developments in areas such as the resolution/insolvency of banks, the revision of the UK regulatory structure from the Financial Services Authority to the Financial Conduct Authority and Prudential Regulation Authority, and the recently made new crime of reckless management of a bank are all considered in full. There is also discussion of trends in areas ripe for development such as fiduciary duty amongst financial markets participants.