Pension Sues Canadian Banks Over Key Rate -- WSJ

This article is being republished as part of our daily reproduction of articles that also appeared in the U.S. print edition of The Wall Street Journal (January 16, 2018).

TORONTO -- A Colorado pension fund is suing Canada's top six banks and three other lenders for allegedly manipulating a key Canadian lending rate.

The Fire & Pension Association of Colorado filed the lawsuit in U.S. District Court in Manhattan Friday and alleged the banks engaged in an "unlawful conspiracy" to boost their derivatives trading businesses by manipulating the Canadian dealer offered rate between 2007 and 2014.

The lawsuit names Canada's largest banks, Bank of Montreal, the Bank of Nova Scotia, Canadian Imperial Bank of Commerce, National Bank of Canada, Royal Bank of Canada and Toronto-Dominion Bank, along with Bank of America Merrill Lynch, Deutsche Bank AG and HSBC Holdings PLC.

Bank of America Corp., National Bank, RBC, CIBC, HSBC and Bank of Montreal declined to comment. The other banks didn't immediately respond to requests for comment on the lawsuit.

The CDOR is a benchmark rate that aims to reflect the cost of borrowing funds in Canada and is used to calculate interest on several financial instruments, including interest-rate swaps, forward contracts and other derivatives. It is calculated each business day by Thomson Reuters based on submissions from banks of rates at which they would be willing to lend.

The accusations in the lawsuit are similar to those associated with the London interbank offered rate, the scandal-plagued benchmark that is used to set the price of trillions of dollars of loans and derivatives across the world.

The integrity of Libor was called into question following a rate-rigging scandal where traders at numerous banks were able to nudge it up or down by submitting false data. Banks including Barclays PLC, J.P. Morgan Chase & Co. and Royal Bank of Scotland Group PLC were fined billions of dollars and several traders were sent to prison.

The U.K.'s Financial Conduct Authority, which regulates Libor, said in July that the benchmark would be phased out and that work would begin to plan for a transition to alternate benchmarks.

In the lawsuit related to CDOR, the Colorado pension fund noted that BofA, Deutsche Bank and HSBC "have collectively paid approximately $4.4 billion in fines to multiple government regulators for manipulating at least 11 benchmarks..." The suit alleges that their attempts to suppress CDOR are "part of a broader pattern of price fixing and collusion intended to benefit defendants' trading businesses at the expense of investors."

The suit claims that the banks conspired to keep CDOR rates low by intentionally quoting lower rates because they were emphasizing derivatives businesses that required them to pay rates based on CDOR. The lower rate saved the banks money and boosted profits on interest- rate swaps and other CDOR-based obligations. The Fire & Police Pension fund said it had conducted more than $1.2 billion in CDOR-based business. It alleges that, it "paid more or received less than it should have in those CDOR-based derivatives transactions."

Canada's Office of the Superintendent of Financial Institutions in 2014 said it would more closely monitor banks' submission process to Thomson Reuters after noting there had "not been reports that CDOR, or other Canadian financial benchmarks had been manipulated." The agency published guidelines for banks to ensure their internal controls over the submission process were adequate.

The Colorado pension fund said it would continue to look for evidence of collusion and price fixing as the lawsuit progresses. "Plaintiff believes it will unearth additional evidence in support of its claims after a reasonable opportunity for discovery."

(END) Dow Jones Newswires

January 16, 2018 02:47 ET (07:47 GMT)