Regulators Near Pacts to Settle U.S. Rate Probes

U.S. regulators are nearing settlements with multiple banks and broker ICAP PLC for allegedly manipulating a financial benchmark used to calculate a wide range of interest-rate products, according to people familiar with the matter.

Several banks are expected to each face hundreds of millions of dollars in fines as part of agreements with the Commodity Futures Trading Commission to resolve allegations their traders manipulated the ISDAfix swap rate, the people said.

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It is unclear which banks are close to settling the probes. U.S. and European banks, including some of the more than one dozen banks that were involved in setting the rate, have been under investigation.

The commodities regulator also is weighing punishments against London-based ICAP, the world's largest broker by any measure, which administered the benchmark and allegedly helped the banks in their attempted manipulation, the people said.

Regulators are wrestling with how stiff a punishment to potentially impose against ICAP, according to the people. CFTC sanctions could range from ordering extensive overhauls to a large fine commensurate with the number of alleged attempts at manipulating the benchmark, a person familiar with the probe said. Because ICAP played a central role in the calculation of the twice-daily rate, such a fine could jeopardize the company's business, the person said. ICAP declined to comment. It has previously said it is cooperating in the CFTC inquiry.

The $381 trillion market for interest-rate swaps is dominated by big banks, which charge everyone from hedge funds to manufacturing companies a premium for the trades designed to protect against fluctuations in interest rates. The swaps are settled using the benchmark rate.

U.S. authorities have been investigating the ISDAfix for several years, as they work their way through probes of banks' alleged manipulation of various benchmarks. Six global banks have paid more than $9 billion to U.S. and European authorities to resolve charges of foreign-currency manipulation, and a similar group of banks has paid more than $8 billion to settle comparable charges of manipulating the London interbank offered rate, or Libor. The ISDAfix investigation isn't expected to result in fines as large as those arising from the other two probes, people familiar with the matter said.

In 2013, U.S. and British authorities fined ICAP $87 million for its alleged role in the Libor scandal. ICAP neither admitted nor denied wrongdoing.

The banks under investigation in the ISDAfix case have turned over reams of data and documents to CFTC investigators as part of a broad probe into whether traders skewed numbers used to calculate the rate to benefit their bank's derivatives positions. According to chat transcripts from banks' messaging systems reviewed by The Wall Street Journal, some traders openly remarked on the opportunities for manipulating the benchmark.

ICAP last month said that it incurred £ 4 million ($6.26 million) in legal costs. Also last month, Barclays PLC became the first bank to settle allegations its traders worked to manipulate the rate from 2007 to 2012, agreeing to pay a $115 million penalty to the CFTC.

The British bank neither admitted nor denied the findings, which included allegations that its traders executed bids and offers leading up to the 11 a.m. window in which the rate is set in order to move it. In announcing the settlement, Barclays described the investigation as "industrywide."

The ISDAfix U.S. dollar rate is quoted twice a day, at 11 a.m. and 3 p.m. ICAP polled a panel of banks about the rate during a specific time period and asked them to submit estimates. Outliers were eliminated and an average was taken from the remaining contributions.

During the polling window, the banks could change their contributions, which was allowed under the rules.Last year, global trade group International Swaps and Derivatives Association Inc. removed ICAP from its role in the ISDAfix and moved to an automated rate-setting system.

U.S. criminal authorities were initially involved in the ISDAfix investigation, but no criminal charges appear likely to result from the probe, some of the people familiar with the matter said.

The corner of ICAP's Jersey City, N.J., office in which it administered the ISDAfix benchmark became known as "Treasure Island" because it was so lucrative for the brokers who worked on the desk, former ICAP officials said.

When it is compiled, the ISDAfix relies on data about the prices of certain instruments being manually typed in by ICAP employees. One ICAP official told investigators that he witnessed data being delayed and massaged to influence the benchmark's level to suit the interests of the brokers' clients at banks, a former ICAP executive said.

In one example cited by the CFTC, a Barclays trader in 2007 said that the U.S. dollar ISDAfix was "f— random" and "what happens at eleven is the bloody thing moves like half a basis point up and down because everybody's trying to bang the screen," referring to an attempt to move the ISDAfix level. A basis point is one-hundredth of a percentage point.

In another exchange, Morgan Stanley's head of euro swaps trading, Faisal Butt, wondered to a colleague at a rival bank in the summer of 2009 why the other bank didn't do more trading business involving the ISDAfix benchmark. "One thing I don't understand with u guys," Mr. Butt wrote, according to a copy of the Aug. 20 chat transcript reviewed by the Journal. "U guys don't have much isdafix. As in im v surprised. Here it is much bigger, as in the option guys r all over it and insist on moving screens etc.…Gives good opportunities for others though!!!"

A person familiar with the exchange said Mr. Butt's statement to "moving screens" appears to be a reference to get ICAP to tweak its ISDAfix levels, which are transmitted onto traders' computer screens.

Mr. Butt left Morgan Stanley in November 2012, according to U.K. regulatory records, and now works at hedge fund Brevan Howard Asset Management LLP. There is no indication that he is under investigation, and he hasn't been accused of any wrongdoing.

Reached by phone in late 2013, Mr. Butt referred queries to a Brevan Howard spokesman. Representatives of Brevan Howard and Morgan Stanley declined to comment.

(By David Enrich)