Traders suspended in growing scandal of 'manipulation of rates' which determine how much we pay for loans and mortgages

Swiss bank UBS has suspended some of its traders in connection with a growing scandal over the alleged manipulation of rates which determine how much we pay for loans and mortgages.

An unspecified number of traders at UBS were suspended last year and another group followed in late January, according to reports.



This is the latest twist in an international probe which has been dragging on for over a year.



Regulators are investigating allegations that banks have been manipulating crucial interbank lending rates which help determine how much we pay for mortgages and loans.



An unspecified number of traders at UBS have been dismissed in recent months in connection with an alleged rates manipulation scandal

Last March UBS was one of four banks to have received subpoenas about the setting of the Libor rate between 2006 and 2008, along with Citigroup, Bank of America and Barclays.



The rate - known as Libor – is crucial to billions of pounds of trades and is a key measure for calculating anything from corporate loans to mortgages.

It is estimated that around £2.3trillion of financial products – including complicated investments called derivatives - are linked to Libor.



A sharp rise in Libor in 2007 was regarded as one of the early warning signs of the credit crunch, as banks started to charge each other more and more to borrow money.



The rate is set every morning. Banks submit their quotes to trade body the British Bankers’ Association. The BBA then takes an average figure.

There are concerns that banks were pushing down the rates during the crisis to over-state their health during the financial crisis.



Last weekend it emerged that RBS had sacked an investment adviser and two traders in the autumn.

The three dismissals came on top of the sacking of Tan Chi Min from RBS’s Singapore operation last year. His departure, now the subject of a wrongful dismissal claim, involves an allegation that he tried to influence the bank’s Libor quote to boost his trading position.

Probe: RBS, Barclays, Citigroup, Deutsche Bank and UBS allegedly rigged the Libor rate, the benchmark for the cost of borrowing

The Libor rate has a huge influence on borrowing costs and ultimately will be a key factor in helping banks determine rates on millions of business and personal loans and mortgages.



Because so many complicated financial investments are linked to Libor, experts say it will be very difficult to work out how customers are affected by any manipulation – and who has lost out.

'It could be very serious, because so many financial instruments are based on it,' said Professor Andrew Clare of Cass Business School in London. 'If something has gone wrong, how would you work out who has been disadvantaged? It is very difficult to imagine.'



Libor is managed by the British Bankers' Association, the banking trade body, which has put together for each currency a panel of those banks most active in that currency.



The BBA states that Libor 'is the primary benchmark for short-term interest rates globally', adding: 'It is used as a barometer to measure strain in money markets and often as a gauge of the market's expectations of future central bank interest rates.'

The Financial Services Authority is investigating the matter with the US Securities and Exchange Commission, the Swiss Competition Commission and regulators in Japan.

Their investigations are said to focus on three concerns.



First is that Libor rates may have been held down artificially in the financial crisis. This would have made banks look more secure than they were.



The second is whether bankers setting Libor rates leaked their data to traders ahead of their official release.



The third is whether traders at the banks and at organisations such as hedge funds may have tried to influence the rate by making suggestions or demands on the bankers providing the Libor quotes.



UBS has refused to comment.



THE 'GLOBAL PULSE-RATE' AND WHY A FIX MATTERS

Libor, the London Interbank Offered Rate, is, quite simply, the pulse-rate of the global economy. Set in the City each day, it is a benchmark for the cost of borrowing and is included in millions of financial contracts around the world. A panel of banks are asked each working day to give a figure for the rate of interest they would expect to pay to borrow money from another bank. Every day at 11am each member gives its answer.

The answer is not based on any actual borrowing, but is supposed to be an 'expert' assessment of the market price. The quotes are compared and the top and bottom quarter in the range are excluded and an average is calculated from the remaining estimates.

The Libor rate, set in the City each day, is a benchmark borrowing coast around the world This process is carried out for borrowing in a variety of currencies and for a range of loan terms.

The result is a series of benchmarks with names such as the three-month dollar Libor rate. These are used as reference points for a huge number of products and contracts.

A commercial loan will often be specified as being at Libor plus a set figure, in the same way that a tracker mortgage is set at the base rate plus a set amount.

The Libor rate has a huge influence on borrowing costs and ultimately will be a key factor in helping banks determine rates on millions of business and personal loans and mortgages.

About £2.3 trillion of financial products worldwide are linked in some way to Libor rates.

The consequences of Libor having been manipulated would be horrendous, say experts, not least because it could spark a blizzard of lawsuits from those who believe themselves to have been victims.