A cluster of big banks has been named in a new lawsuit alleging manipulation of a key benchmark lending rate in Canada, opening up a new front in a global scandal that has led to billions of dollars in fines and penalties.
The plaintiff, the Fire and Police Pension Association of Colorado, is accusing nine banks of colluding over a period of about seven years in the manipulation of the Canadian Dealer Offered Rate (CDOR), in order to boost profits for their derivatives trading businesses.
CDOR, a benchmark created by the Canadian Bankers’ Association, is supposed to reflect the cost of borrowing Canadian dollars in North America, according to the lawsuit, which was filed last Friday in the southern district of New York.
Instead, the suit claims, the banks conspired to “suppress” CDOR by making artificially low submissions that did not reflect the actual rates at which they were lending. On “hundreds” of days during the period in question, the suit adds, the banks’ submissions were identical, suggesting a pattern of collusion through electronic message platforms, phones and emails.
By lowballing submissions, the banks stood to make more money from their derivatives businesses, from which they “aggressively” marketed and sold interest-rate swaps, forward-rate agreements and other CDOR-based products to pension funds, hedge funds and companies in North America. The lower the CDOR rate, the less interest the banks would owe on such positions. At their peak, the derivatives books were about 50 times bigger than the banks’ aggregate CDOR-based loan portfolios.
The case suggests that banks are still on the hook for their roles in setting benchmark interest rates, which underpin hundreds of billions of dollars of loans and hundreds of trillions of derivatives.
Until the scandal erupted six years ago Canada’s main bank regulators had mostly kept a distance from the CDOR-setting process. But in January 2014 Canada’s Office of the Superintendent of Financial Institutions announced that, in view of a global crackdown by regulators, it would take more of an active role in oversight and would examine the “governance and risk controls” of the banks involved.
The class-action lawsuit names nine big banks — Bank of Montreal, Bank of America Merrill Lynch, Deutsche Bank, Scotiabank, CIBC, HSBC, National Bank of Canada, Royal Bank of Canada and Toronto-Dominion Bank — along with various subsidiaries, which were the most active dealers in CDOR between August 2007 and June 2014.
National Bank, RBC, BofA, CIBC, HSBC, Deutsche Bank, and TD declined to comment. BMO and Scotia could not be immediately reached for comment
The complaint notes that BofA, Deutsche and HSBC have collectively paid about $4.4bn in fines to several government regulators for manipulating at least 11 financial benchmarks in US dollars, yen, Swiss francs and Singapore dollars.
The plaintiff, which transacted more than $1.2bn in CDOR-Based derivatives during the period in question, alleges violations of the Sherman Act, a landmark antitrust statute; the Commodity Exchange Act, which governs futures trading; and the Racketeer Influenced Corrupt Organization Act, often known as Rico.