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Now you see it, now you don’t – LIBOR, Repo rate and For. Ex Now you see it, now you don’t – LIBOR, Repo rate and For. Ex manipulation Lloyd Maynard

For. Ex Manipulation • For. Ex: an unregulated market that ‘follows the sun. ’ For. Ex Manipulation • For. Ex: an unregulated market that ‘follows the sun. ’ • The London Fix: 15: 59 and 30 seconds to 16: 00 and 30 seconds • Used by banks, international equity portfolio managers, multinationals • An interbank market that runs on a credit-approved system

Manipulating For. Ex: Frontrunning • 15: 45 pension fund order sell £ 1 bn Manipulating For. Ex: Frontrunning • 15: 45 pension fund order sell £ 1 bn in exchange for euros at the Fix. £ 1 = € 1. 4000. • 15: 50 trader sells £ 250 m of bank’s sterling at € 1. 3995. BANK CUSTOMER € 349, 875, 000 £ 250, 000

Manipulating For. Ex: Frontrunning • At Fix: sterling sell orders flood in, sterling weakened Manipulating For. Ex: Frontrunning • At Fix: sterling sell orders flood in, sterling weakened exchange rate £ 1 = € 1. 3975. • Trader re-purchases his sterling for € 1. 3975. € 500, 000 profit: 15: 50: £ 250 m x € 1. 3995 = € 349, 875, 000 received 16: 00: £ 250 m x € 1. 3975 = € 349, 375, 000 spent € 500, 000 £ 250, 000 € 349, 375, 000

Manipulating For. Ex: Frontrunning • Mere front-running is not illegal • Insider trading Manipulating For. Ex: Frontrunning • Mere front-running is not illegal • Insider trading

Manipulating For. Ex Banging the close • 15: 45: trader receives client order to Manipulating For. Ex Banging the close • 15: 45: trader receives client order to sell € 1 bn for Swiss francs. • 15: 59 and 30 seconds: trader sells his bank’s euros (€ 1 bn if possible), driving the price down. • 16: 00 and 10 seconds: trader purchases his client’s euros at the lower FIX price. • Profit: difference in starting FX rate verses median Fix rate – 0. 02% = 200, 000 Swiss franc profit

For. Ex Manipulation: the losers? • You and I? • International equity portfolio holders For. Ex Manipulation: the losers? • You and I? • International equity portfolio holders • Companies with an international dimension

For. Ex claims: the hurdles • The claim: Guardian Care Homes-type implied term/representation. • For. Ex claims: the hurdles • The claim: Guardian Care Homes-type implied term/representation. • Proving breach will be difficult: – Front-running alone not unlawful – Price spikes inherent within the Fix? – Banks made actual trades – Has the FX rate been manipulated? • Most likely fall-out will be political

Repo Rate Manipulation • Repo is a sale and repurchase agreement, often linked with Repo Rate Manipulation • Repo is a sale and repurchase agreement, often linked with government bonds. • Bonds: value – coupon – tenor • BBA Repo Rate: short-term lending reference rate (May 1999 – December 2012) – Submissions rate based upon theoretical rather than actual trades

Repo Rate Manipulation • Bank of England quantitative easing: Special Liquidity Scheme (“SLS”) • Repo Rate Manipulation • Bank of England quantitative easing: Special Liquidity Scheme (“SLS”) • Price of SLS: spread between 3 m LIBOR and 3 m Repo, with 2% minimum. • Lloyds & BOS: submit higher Repo rate to reduced spread. • The loser? UK taxpayers

LIBOR Scandal • LIBOR: similar to Repo Rate, a submissionsbased reference rate based upon LIBOR Scandal • LIBOR: similar to Repo Rate, a submissionsbased reference rate based upon theoretical trades: “At what rate could you borrow funds, were you to do so by asking for and then accepting inter-bank offers in a reasonable market size just prior to 11 am? ” • Average of the middle 50%

LIBOR Scandal: the claims • Breach of implied term/representation • One step forward: Graiseley LIBOR Scandal: the claims • Breach of implied term/representation • One step forward: Graiseley Properties Limited v Barclays [2012] EWHC 3093 (Comm) – Graiseley granted permission to amend POC to plead implied terms and representations PAST FUTURE

LIBOR Scandal: the claims • First step back: Deutsche Bank v Unitech Global Ltd LIBOR Scandal: the claims • First step back: Deutsche Bank v Unitech Global Ltd [2013] EWHC 471 (Comm) • Floodgates – [27]. • Insufficient conduct from which to imply such a representation – [28]-[29], [36] • Implied term as to future conduct was arguable: PAST FUTURE

LIBOR Scandal: the claims • Second step back: Deutsche Bank v UGL [2013] EWHC LIBOR Scandal: the claims • Second step back: Deutsche Bank v UGL [2013] EWHC 2793 (Comm) • Permitted amendment of defence to plead implied term as to authenticity of LIBOR going forward PAST FUTURE

LIBOR Scandal: the claims • One step forward: Graiseley Properties and Unitech Global [2013] LIBOR Scandal: the claims • One step forward: Graiseley Properties and Unitech Global [2013] EWCA Civ 1372 • Offer alone sufficient conduct: restaurant customer – [28] • Fraud unravels all (disclaimers redundant) – [29] • Representations as to other bank’s conduct weaker but arguable – [31]

LIBOR Scandal: the claims • Two steps back? – Guardian Care Homes case settled LIBOR Scandal: the claims • Two steps back? – Guardian Care Homes case settled in April 2014. Barclays reportedly restructured GCH’s loan at a cost of £ 40 m. – Domingos da Silva Teixeira claim for € 11. 1 m misselling IRHP and FX swap claim settled by Barclays.

LIBOR Scandal: the claims • Cost of Funds clauses: ‘If the Bank is unable… LIBOR Scandal: the claims • Cost of Funds clauses: ‘If the Bank is unable… to obtain a LIBOR rate or the Bank calculates that the LIBOR rate is less than the cost to the Bank of funding the Loan, the Borrower shall, in respect of each Interest Period, pay to the Bank interest at a percentage rate per annum equal to the aggregate of…’ • What if LIBOR was less than the actual cost of funding the loan, due to the bank’s manipulation? • General claims of LIBOR manipulation

Conclusions • FX manipulation: some litigation, large financial clients, difficulty establishing breach • Repo Conclusions • FX manipulation: some litigation, large financial clients, difficulty establishing breach • Repo rate manipulation: no claims • LIBOR: there are settlements to be won • Your existing clients

Questions and Answers Lloyd Maynard LMaynard@forumchambers. com Questions and Answers Lloyd Maynard [email protected] com