Rate-rigging Activities at Banks in Singapore

Ms Foo Mee Har asked the Prime Minister (a) what is the impact on local interest rates and foreign exchange benchmarks resulting from the activities of the 133 traders found to have engaged in attempts to influence Singapore's financial benchmarks; (b) how does MAS determine the varying tiers of additional statutory reserves to be held by banks involved in the rate-setting scandal; and (c) how does MAS' supervisory action against the said banks, particularly the imposition of additional statutory reserves, compare with other Central Banks' prescribed actions.

Mr Yee Jenn Jong asked the Prime Minister (a) whether the existing framework is insufficient to prevent the rigging of financial benchmarks by the 133 traders or to prosecute them; (b) how many of the cases are referred to the Attorney-General's Chambers and Criminal Investigation Department; (c) what inappropriate practices are uncovered; (d) what have the affected banks done to correct their deficiencies; and (e) what is the impact of the traders' actions on the market and consumers.

Assoc Prof Tan Kheng Boon Eugene asked the Prime Minister whether our criminal and banking laws are sufficiently comprehensive to prosecute the 133 traders found to have engaged in attempts to rig Singapore's financial benchmarks; (b) whether MAS will name these 133 traders and impose individual sanctions on them, including suspending them from financial trading and other similar activities; and (c) whether the imposition of additional statutory reserves to be held by the affected banks is a proportionate sanction and a sufficient deterrent.

I thank Mr Ang Wei Neng, Ms Foo Mee Har, Mr Yee Jenn Jong and Assoc Prof Eugene Tan for their questions on MAS' supervisory actions against banks with regard to the attempts by some traders to influence the setting of local interest rate and foreign exchange benchmarks.

MAS carried out its review of the benchmark submission process, on an industry-wide basis, and calibrated its supervisory actions against all 20 banks,

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taking into account three factors: first, the number of traders within the bank who attempted to inappropriately influence the benchmarks; second, the number of banks with which the traders had collaborated, and, third, the number of times these attempts occurred.

MAS has censured the banks involved and directed them to adopt measures to address their deficiencies. The banks must report their progress to MAS on a quarterly basis and conduct independent reviews to ensure the robustness of their remedial measures. The banks have started implementing the remedial actions as directed by MAS. Nineteen banks have also been required to set aside additional statutory reserves with MAS for a period of one year.

The imposition of additional statutory reserves represents a financial cost to the banks, in terms of the borrowing cost or the income foregone as they would have to place these reserves with the MAS at zero interest. In considering the level of additional statutory reserves to be imposed on the banks, MAS had taken into consideration the amount of penalties imposed by other regulators for deficiencies in the setting of the London Interbank Offered Rate (LIBOR) and Euro Interbank Offered Rate (EURIBOR) benchmarks. At the same time, MAS also took into account the smaller size of our financial markets compared to those in the major economies. For example, the estimated contract size referenced to Singapore dollar benchmarks is less than 0.2% of that which is referenced to LIBOR.

The additional statutory reserves also serves as an incentive for the banks to put in place the necessary control measures required by MAS. MAS may vary the duration that the additional statutory reserves are to be placed with MAS, depending on its assessment of whether the remedial measures put in place by each bank are adequate. If any of the banks fail to comply with MAS' directives, MAS can impose other penalties, including fines.

Ms Foo and Mr Yee asked about the impact of the traders' actions on financial markets and consumers. While the investigations found clear evidence of discussions and agreements to influence benchmark submissions, there was no conclusive finding that the traders had succeeded in manipulating the actual financial benchmarks, or that their attempts have had any unidirectional impact on the financial benchmarks applicable to consumers.

Assoc Prof Tan asked if MAS would be taking any actions against the traders involved, while Mr Ang asked if the banks' senior management were

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aware of their traders' misconduct. Mr Yee Jenn Jong also wanted to know the number of cases that MAS had referred to the Commercial Affairs Department (CAD) and the Attorney-General's Chamber (AGC). Let me clarify on these issues.

While a few line managers were aware of attempts to inappropriately influence benchmark submissions, MAS did not find evidence that the banks' senior management were aware of their traders' misconduct. In fact, the banks' senior management took the MAS-initiated review seriously and co-operated fully with MAS. Many banks dedicated substantial senior management time and financial resources to do the review. Their strong commitment to do the right thing showed that banks here believe in upholding the integrity of Singapore's banking system, its financial markets and its banking professionals.

Nevertheless, MAS takes a serious view of the inappropriate behaviour by the traders involved and has censured the banks' senior management for failing to exercise proper governance and oversight and to institute robust rate submission controls and processes.

While MAS has not named the line managers and traders involved, nor imposed individual sanctions on them, all of them have been subject to disciplinary actions by their employers, including termination of employment, loss of bonuses, or demotions. The banking industry has also put in place measures to facilitate reference checks, so that an institution would be made aware if a potential hire had been implicated in attempts to inappropriately influence benchmarks.

MAS referred five cases to CAD for investigation. AGC and CAD considered whether any criminal offences were disclosed by such alleged manipulation of benchmarks. However, there was insufficient evidence to support any prosecution based on our existing criminal laws.

Mr Ang and Mr Yee asked for more details about what MAS uncovered in its review. MAS found 20 banks with deficiencies in their governance, risk management, internal controls, and surveillance systems relating to submissions of financial benchmarks. These weaknesses allowed 133 traders to participate in attempts to inappropriately influence the submissions of financial benchmarks.

Financial supervisors internationally generally do not share detailed information about supervisory dealings with the financial institutions they

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regulate. Nonetheless, in this instance, MAS was of the view that it would be in the public interest to name the banks involved and to give an indication of the seriousness of the lapses in each bank, MAS, therefore, announced on 14 June the supervisory actions that it took against groups of banks.

Like other major jurisdictions, the setting of financial benchmarks is not a regulated financial activity. As financial benchmarks are typically developed by the industry in response to market needs, we have so far relied on industry self-governance of the activity. Hence, our regulatory frameworks do not provide for specific criminal or civil sanctions for the manipulation of such benchmarks. This is also the case in many other countries, which do not have the regulatory powers to comprehensively penalise rate-fixing activity.

Going forward, however, in light of this and other recent experiences abroad, MAS will strengthen its regulatory powers and oversight of key financial benchmarks, including the SIBOR, SOR and FX Benchmarks. Legislation will be changed to prohibit the manipulation of any financial benchmarks and to introduce criminal and civil sanctions for such misconduct. Taken together, these changes will enhance the credibility of financial benchmarks in Singapore, and minimise the risk of benchmark manipulation. MAS is conducting a public consultation on the proposed regulatory framework and will finalise the framework taking into account feedback from the consultation as well as the evolving global regulatory standards.

Besides the MAS regulatory measures, the industry also has an important part to play in enhancing the robustness of these benchmarks. In this regard, the Association of Banks in Singapore (ABS) and the Singapore Foreign Exchange Markets Committee (SFEMC) have announced measures to improve the robustness of the benchmark rates. These measures include enhancing the governance framework for benchmark rates setting, and changing the methodology used to determine certain benchmark rates so as to place more reliance on actual transactions. MAS welcomes these new measures.

In sum, MAS has taken firm and appropriate supervisory actions against the banks, based on a careful assessment of their respective deficiencies. Its actions are proportionate to the scale of the misconduct uncovered, and reflect the smaller size of our markets. MAS' prompt supervisory response, together with the enhancements to the regulatory framework for setting key financial benchmarks, will safeguard the credibility and reliability of such benchmarks set in Singapore.

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Mdm Speaker, I thank the Acting Minister Lawrence Wong for the comprehensive reply. Given the severity of the interest rate rigging activities by the 133 traders, the punishment received by the banks appears to be a light tap on the hand. In contrast, RBS was fined $610 million for rigging LIBOR. With the current excess liquidity in the world, the banks would hardly feel a pinch by having to set aside extra reserves with zero interest rate for a year. Maybe MAS could consider asking the banks to pay a few million dollars in fine and use the funds to help the lower income families, for example, the lower-income families who were affected by the recent haze. Thus, my first supplementary question is: would MAS consider asking the banks to pay a fine, in lieu of extra reserves?

The second supplementary question is, in fact, a clarification. Mr Wong did not seem to have replied to the first portion of my question as to which bank has the highest number of traders who had tried to rig the interest rates, as well as the highest number of attempts to rig the rates between 2007 and 2011. If the information is confidential, I hope at least that Mr Wong can share with us who is the highest ranking officer who had rigged the interest rates and asked to leave the job? And of those who stayed, what is the highest ranking officer?

Madam, I thank the Member for the follow-up questions. In terms of the severity of the actions taken by MAS and compared to what other regulators have done overseas – which was alluded to by the Member – I would say that MAS has, indeed, looked at what other regulators have done. We have looked at it and then adjusted according to the size of the markets. As I mentioned earlier, the estimated contract size referenced to Sing dollar benchmarks is only about 0.17% of the estimated size of contracts referenced to LIBOR and EURIBOR benchmarks. So, there have been some adjustments to take into account the different sizes of the markets. Other than that, we have looked at what other regulators have done in terms of financial penalties, and MAS has adjusted and calibrated our actions accordingly.

MAS' actions are not in the terms of a fine but in terms of additional statutory reserves. This, in itself, as I mentioned in my reply, would impose a significant burden on the banks. MAS is unable to impose a specific fine because we do not regulate rate-setting activities today; neither do many other jurisdictions. In fact, the jurisdictions that impose the fine did not rely on their financial regulations to impose the fine. They relied on other legislations and regulatory measures to impose the fines. It was not through financial regulations.

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In our case, we have looked at whether the actions undertaken by these individuals were criminal. CAD and AGC had investigated thoroughly and we were unable to find sufficient evidence to prosecute. We have not taken any further action, but MAS has taken firm and appropriate action through the imposition of additional statutory reserves.

On the second point about which bank had the highest number of traders who tried to manipulate the rates, I would say that MAS has put out information according to groups of banks based on the severity of the attempts to inappropriately influence the benchmarks. That information has been put out – in terms of groupings of severity. The group of banks that ranked highest in terms of severity of attempts is public information – UBS, ING and RBS. That is out in the public domain.

I thank the Minister for his comprehensive response. I have three supplementary questions. One, in light of the fact that financial benchmarks in the future will be using actual trades instead of current survey method, which makes Singapore one of the first countries in the world to implement changes in the way benchmarks are calculated, I would like to ask the Minister how local interest rates and foreign exchange are likely to be impacted, especially during periods of high market volatility and tight liquidity under the new system where we use actual trades as benchmarks.

The second supplementary question which I think is in a lot of people's mind is that, given SIBOR is the most commonly used rate to peg local mortgage interest rates and has a large impact on the consumers, could the Minister share with the House the background and details on why SIBOR will exceptionally continue to be set using the survey method?

The last question is: at the individual level of responsibility, yes, Minister, I think all banks have taken action. But we have observed different banks had taken different kinds of actions against the traders, for example, some are forfeiting their bonuses; some have demotion and they are really at the discretion of the banks. What appropriate disciplinary action could MAS have taken on individual traders in proportion to their role and degree of misconduct to send a consistent and strong signal to the industry that such behaviour will not be condoned?

Different banks have taken different actions based on their discretion, or at least that was what came across as such. Could MAS have taken a consistent set of actions to send a strong signal?

I thank the Member for the three questions. Let me take them in turn. In terms of a sort of assurance of actual rates, especially if volatility were to be high, I think that is something that we will have to monitor. This idea or the principle of relying more on actual versus survey rates is a principle that I think, internationally, regulators have discussed and have endorsed this move towards using actual rates. Will it have an impact when the markets are more volatile, when there is lack of liquidity, and then how do you actually look at actual rates, because there are not enough trades in the market, I think that is an issue that is real. But it is something that we have to evolve as we go forward. It is an issue that is not just us confronting it but many other regulators are looking at that same issue.

And that is also why, to answer the Member's second question, not all rates, not all benchmarks have moved to actual rates. For some benchmarks, we are still using survey data and that includes SIBOR. Likewise, we are not the only ones looking at this issue because, on some benchmarks where there are data, where there are actual transactions where the markets are liquid, we are using actual transacted data. For other benchmarks, we are still relying on survey submissions by banks. And SIBOR is one of them. Likewise, in other jurisdictions, they are moving step by step rather than doing a sort of conversion entirely. For SIBOR, even though it is still based on survey submissions, what we have done is to enhance the governance and look at improving the oversight mechanisms. And this was done with the Association of Banks and with that more robust system. Even though it is still on a surveillance method, I think the SIBOR system would be more robust than it used to be.

On the third point about sanctions on individuals and whether there is consistency in terms of what MAS can do, as I mentioned earlier, for the individuals that we investigated, we could not find evidence to prosecute for criminal wrongdoing. Therefore, the sanctions that have been done are taken at the company or firm level. Yes, there are differences because there are differences in the actions that each individual took and these have to be case-specific. Firms have done different things − some have demoted; some have asked these individuals to leave but, across the board, the actions that these individuals have taken will be on the record and the industry, as a whole, has committed to a reference check so that, in future, should they apply for jobs within the industry, the actions that they did this time will be on the record and

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will be taken into consideration for future employment.

That is the approach we have taken, taking into account the fact that there was not sufficient evidence to pursue further action on an individual basis.