“From Collusion to Competition” – 17th Issue

Oct 09, 2014

CPI Cartel Column edited by Rosa Abrantes-Metz (Global Economics Group/NYU Stern School of Business)

Welcome to the October issue of “From Collusion to Competition.” It has been several months since the last Cartel Column. I would like to dedicate this welcome back issue to one of my very favorite topics: screens for conspiracies and manipulations and their recent successes.

A veritable “who’s who” of high profile financial benchmarks has been under investigation for years now, and likely for years to come. The first was USD LIBOR. In 2008 two Wall Street Journal articles reported possible manipulation intended to artificially depress the LIBOR rate based on an empirical screen. These reports were quickly followed by my own research presenting evidence of possible collusion between many of the participating banks well before the financial crisis. Investigations then extended to other “Ibors” including Euribor, Yen LIBOR and TIBOR. To date many banks have already been fined more than $6 billion, and more is expected.

After the “Ibors” came foreign exchange (FX), when in mid-2013 Bloomberg presented evidence of a possible manipulation based on screening of price movements. My own work on FX was contained in a December 2013 complaint filed in New York, which extended Bloomberg’s analysis and showed further evidence of highly anomalous price spikes at key times of the day when certain benchmarks are set.

The London Gold Fixing was next. In December 2013 I wrote an Op-Ed arguing that the large price declines I observed around the time of the London pm and Silver fixings, when the “price of gold and silver” for the day are determined for the purposes of many derivative contracts, were consistent with collusion to manipulate these benchmarks. A Bloomberg article followed in February 2014 outlining additional results from my research on gold. Since then approximately 30 lawsuits have been filed in the US alone. Last May the UK’s Financial Conduct Authority fined Barclays for gold manipulation.

In 2013 Bloomberg reported that the US Commodity Futures Trading Commission (CFTC) had found evidence of manipulation of ISDAfix, a key benchmark referenced in a number of swaps. My empirical collusion analysis on USD ISDAfix, contained in the complaint filed in September by the Alaska Electrical Pension Fund, shows that once again banks likely colluded to move this benchmark to the benefit of their derivative positions. Four days after this complaint was filed, Bloomberg revealed that the CFTC is reported to have found evidence of criminal (collusive) behavior on USD ISDAfix submissions.

There can be little doubt that major banks are colluding to manipulate many financial benchmarks. I have argued for years that these benchmarks are easy targets for abuse; it is often easy for a handful of banks to move these numbers; even a miniscule movement can give rise to millions in illegal (and risk-free) profits; and virtually nobody is watching. It is also clear that monitoring the data through empirical screens is powerful and effective in identifying this behavior, and authorities around the world need to take the lead on regularly screening these markets to detect and deter manipulation and collusion.

But who else needs to be using screens? The banks themselves, and corporations more generally. The use of empirical screens has to start internally to corporations in order to detect and deter this type of behavior from the start.

My case for the use of screens in antitrust compliance is summarized in my CPI Antitrust Article from February 2012, available here.

It is great to see that antitrust authorities around the world are starting to recognize the need for these empirical methods internally to companies. Examples are the draft document on Corporate Compliance Programs by the Canadian Bureau of Competition available here, and the final document by the Competition Authority from Chile on the same topic, available here.

I expect other agencies will recognize that there is a role for screens in internal compliance in the near future, and so will many corporations.

Enjoy the reading, and feel free to send me comments and suggestions at RAbrantes-Metz@GlobalEconomicsGroup.com.

Rosa M. Abrantes-Metz