ICAP Poised to Lose Central Role in Helping Set ISDAfix

Posted on 01-27-2014 07:01
Summary: Brokerage giant ICAPPLC is poised to lose its central role in helping set a key interest-rate benchmark as regulators continue probes into alleged manipulation of certain market rates.

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Brokerage giant ICAPPLC is poised to lose its central role in helping set a key interest-rate benchmark as regulators continue probes into alleged manipulation of certain market rates.

Market officials plan as soon as Monday to alter the methodology used daily to calculate the benchmark, known as ISDAfix, cutting London-based ICAP out of its longtime role in helping calculate it, according to people familiar with the decision.

The International Swaps and Derivatives Association, which oversees the ISDAfix benchmark, expects to implement the changes this week, the people said. The benchmark is used widely, in areas such as setting payout rates on pension funds, determining the cost of real-estate loans and valuing contracts settled between banks and institutional and wealthy investors.

People familiar with ISDA's plans say banks will no longer submit information about bids and offers on U.S. dollar-based interest-rate swaps to ICAP to help calculate the benchmark. Nor will banks rely as heavily as they do now on ICAP-generated trading data as a reference point for their submissions, the people say. Banks will now determine submissions based on data sources that won't necessarily include trades executed through ICAP, such as trades executed with other banks. The banks will send interest-rate information directly to Thomson Reuters Corp. TRI.T +0.12% , which currently calculates and publishes the ISDAfix benchmark.

"We appreciate ISDA's interest in having a consistent polling process across each of the relevant currencies and fixings," ICAP spokeswoman Serra Balls said.

The shift comes amid a global probe into whether bank traders or brokers at firms such as ICAP were involved in potential manipulation of ISDAfix, people familiar with the probe say. ISDAfix and other benchmarks such as the London interbank offered rate, or Libor, are facing scrutiny from U.S. and European regulators concerned with whether banks and brokers acting as middlemen have sought to profit by coordinating trades or otherwise improperly influencing the rate-setting process.

ICAP hasn't been accused of wrongdoing related to ISDAfix. Still, the development marks a new setback for ICAP after it paid $87 million in fines for its involvement in the alleged manipulation of Libor.

Enforcement officials at the U.S. Commodity Futures Trading Commission have been looking into whether the ISDAfix benchmark has been improperly rigged by traders and brokers across Wall Street, according to people familiar with that probe. ICAP says it is cooperating.

Overseers of financial benchmarks like ISDAfix are broadly reviewing how rates are set and where opportunities for manipulation might be found.

ICAP executives have told people close to the matter they believe the decision to remove ICAP from the ISDAfix process is a result of the investigation into the benchmark. However, people involved in discussions between ISDA and ICAP say the link hasn't been described explicitly by ISDA.

CFTC officials have issued multiple subpoenas to banks and brokers involved in setting the rate, people familiar with the investigation say. The agency is looking into whether ICAP brokers interfered with ISDAfix by timing trades to benefit certain clients, for example by holding back some bids or offers temporarily, the people say.

People with knowledge of ICAP's trading have countered that such a scenario is unlikely because any trades held back intentionally at ICAP would attract attention.

The shift away from ICAP threatens to diminish its role in setting and distributing the leading benchmark tied to trillions of dollars in derivatives that help determine borrowing costs for companies, governments and other investors. Traders may have less incentive to route certain trades through ICAP, since their transactions might not have as great an impact on ISDAfix as they did previously, according to people familiar with the process of setting the benchmark.

ICAP has been involved in the ISDAfix process for more than 15 years. The firm makes money from data linked to the benchmark and commissions on trades generated around it. Internally, ICAP executives don't expect the ISDAfix change to have a material effect on its financial performancebut privately acknowledge it is a negative development for the firm, according to people close to ICAP.

In recent weeks, ICAP has argued with ISDA and other partners that cutting the firm out of the ISDAfix process and minimizing the use of its data will make ISDAfix submissions subject to inconsistency and potential manipulation, according to people familiar with private discussions involving ICAP.

Part of ICAP's argument is that untethering ISDAfix from data the firm provides makes the benchmark more reliant on information from individual banks' trading desks.

For years, ICAP has gathered data from banks each morning during a set time window just after 11 a.m. Eastern time. ICAP provides reference rates based on executed trades and executable bids and offers at ICAP, reflecting data generated by its BrokerTec electronic-trading platform for U.S. Treasuries.

Banks opt to agree with the reference rate or submit rates at different levels. A certain number of the highest and lowest submissions are eliminated, resulting in an average calculated by Thomson Reuters. Thomson Reuters declined to comment.

ISDAfix is published daily for six currencies. ICAP's involvement is limited to the influential U.S. dollar-based rates. Its brokers in Jersey City, N.J., have overseen the ISDAfix submissions; the interest-rate swap desk there is known internally as Treasure Island because of the potential for profits, people familiar with the business say.

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