The $2.5 billion of settlements reached in the London interbank offered rate rigging scandal are compelling banks to hand over information in the probe of a separate financial benchmark tied to interest rate derivatives.
Barclays PLC, UBS AG and Royal Bank of Scotland Group PLC, the lenders fined in the LIBOR case, risk criminal prosecution in the U.S. under the settlement agreements if they're seen as withholding evidence related to potential manipulation of the benchmark known as ISDAfix, according to a person with knowledge of the matter, who asked not to be identified because details of the investigation aren't public.
“Those banks have to cooperate at the risk of blowing whatever agreements they have,” Peter Henning, a Wayne State University law professor and a former Justice Department prosecutor, said in a telephone interview. “They are over a barrel.”
The Justice Department deferred prosecution against the three banks as part of the LIBOR-rigging settlements, and the Commodity Futures Trading Commission, the primary investigator in the ISDAfix probe, will keep it “apprised of what's going on,” Mr. Henning said.
Spokesmen for Barclays, UBS, RBS and the CFTC declined to comment.
Regulators are probing manipulation of key financial gauges in world markets on everything from interest rates to currencies to commodities.
By rigging ISDAfix, banks stood to profit on separate derivatives trades known as swaptions, or options on rate swaps, that they had with clients who were seeking to hedge against moves in interest rates. Banks sought to change the value of the swaps because the ISDAfix rate sets swaptions prices, the person said.
Swaptions, which give the holder the right to swap a fixed- for a floating-rate obligation at some future point at a predetermined level, are used by money managers like Pacific Investment Management Co. and the manager of Dutch postal operator PostNL NV's pension, according to regulatory filings.
Representatives from the Dutch company and PIMCO didn't immediately respond to requests for comment.
“The real risk to these banks is private lawsuits” from money managers and pension funds, Mr. Henning said. “This isn't going up against mom and pop,” he said, “and that's scary for the banks if there was manipulation.”
