Despite widespread outrage among institutional investors over the fixing of the London interbank offered rate (LIBOR), European buy-side firms appear reticent to go toe-to-toe with the sell-side to seek compensation.
The sheer complexity of trying to determine the extent to which a buy-side firm was left out of pocket across the instruments that rely on LIBOR following the rate rigging, combined with the potential for compromising longstanding relationships with brokers, have left the buy-side hesitant to act.
"The mechanics involved in analysing any possible compensation amounts is likely to be too heavy,” said Paul Squires, head of trading at AXA Investment Managers. “The Investment Management Association (IMA), as our association body, could look into it, but in some ways they are just as close to the banks as we are, so it is unclear whether there is much appetite to launch a buy-side/sell-side battle. Our sense is that this is more likely to be pursued by the clients themselves or the regulators, rather than driven by asset managers."
While UK-based Barclays is currently the only bank to have been fined by regulators for rigging LIBOR, details of the involvement of other firms – thought to include Citi, Deutsche Bank, Royal Bank of Canada, HSBC and J.P. Morgan – are poised to emerge. Without knowing exactly how each of the banks that set LIBOR were involved in the manipulation, figuring out the effect on individual portfolios is considered near-impossible.
Describing the LIBOR rigging as “truly shocking” and “corrosive” to the financial system, Richard Saunders, CEO at the IMA, whose member firms manage over £3.9 trillion in assets under management (AUM), suggested that legal action should not be ruled out completely.
“It’s difficult to speculate on litigation down the line but if there has been a loss to clients, buy-side firms may need to seek recovery,” said Saunders. “I don't think the relationship between buy- and sell-side would get in the way of this necessarily, but trying to determine the practical impact of how manipulation affected investors is a tough ask.”
No easy feat
The calculation of LIBOR is based on the middle eight rates for overnight lending of funds, submitted daily by 18 banks. This means it is currently unclear whether the rates submitted by Barclays were even included in the final published figures.
Others have pointed out that it is also unclear whether a firm could sue based on the fact that it was simply trading in affected derivatives instruments during the time of the LIBOR manipulation.
Even if this is determined, the next challenge will be to apply the impact of the manipulation to the estimated US$800 trillion worth of instruments relying on LIBOR.
When considering liability-driven investment (LDI), for example, Andrew Connell, head of LDI at Schroder Investment Management, noted that the performance of any LDI coverage asset is primarily driven by changes in long-term interest rates.
“In this context we do not perceive that the apparent historic attempts to manipulate LIBOR settings undermine the material funding risk benefits available from liability coverage strategies,” he said.
LDI strategies attempt to predict future liabilities and use derivatives to hedge a fund’s exposure to measures such as interest rates or inflation.
Rather than trying to recuperate potential losses, the buy-side seems more concerned at the impact on the integrity of the financial system as a whole.
“My biggest disgust lies with the attitude and thinking of the people involved. How are we going to restore investor confidence in financial markets with incidents like this? The reputational damage is much worse than the monetary loss,” said Peter de Proft, director general of the European Fund and Asset Management Association, whose members represent €7.9 trillion in AUM. “We hope that regulators and central banks will do their job in helping to recover losses.”
US steams ahead
The caution in Europe contrasts with a more aggressive approach in the US, with reports Baltimore City Council and a Connecticut-based pension fund are already pressing ahead with legal action.
Appearing before a Treasury select committee on Monday, Paul Tucker, deputy governor of the Bank of England, said the UK’s Financial Services Authority was focused on the damage to financial stability that could arise as a result of US investors launching class action lawsuits. Part of the concern is that those firms which lost out as a result of rate rigging could seek compensation, whereas those which gained will not expect to repay their gains, leading to an imbalance.
Collective lawsuits are not governed by a common legal framework in Europe as they are in the US. The rules for coordinating group litigation also differ across European states, with some such as France, Italy, the Netherlands and Spain allowing associations to represent multiple parties, while others such as Switzerland do not recognise any form of class action.
A number of successful lawsuits brought against custodians by pension funds that were systematically overcharged for FX transactions may have also provided the incentive for US buy-side firms to move forward. Such legal action has included the Massachusetts Pension Reserves Investment Management alleging the Bank of New York Mellon had overcharged by US$20 million for FX transactions, as well as a separate lawsuit filed by the US state of California against the same firm in 2009.