U.S. Borrowers Deserve Protection from Libor

In the wake of the financial crisis caused in large part by the reckless behavior of banks, we have wrestled with institutions that are "too big to fail" and "too big to jail."

Now, after evidence of a widespread fraud on a key benchmark interest rate that has cost borrowers and savers billions of dollars, we may be dealing with something "too big to replace."

The rate in question, which is used to adjust interest rates on everything from swaps to mortgages, is the infamous Libor, an acronym which stands for London interbank offered Rate — the rate at which banks in London supposedly make unsecured loans to each other.

It emerged last year that some of the 18 international banks involved in setting Libor each day were manipulating this rate, which means that on each of millions of securities, loans and retirement plans using Libor as a benchmark someone — U.S. cities and school districts, homeowners, retirees — got cheated.

Regulators found e-mails from bank staffers asking friends at competing banks to fudge the rate in return for steering them brokerage business — or a bottle of champagne or, in one case, leftover sushi!

Three banks — British banks Barclays and RBS and Swiss bank UBS — paid a total of $2.5 billion in fines for falsifying Libor rates.

So once this malfeasance was discovered, banks stopped using the compromised rate in their products, right?

Nope. As with so many of the banks' abusive practices, regulators are moving at glacial speed to rectify the situation, and in the meantime this dubious benchmark continues to be used in numerous financial products.

After due deliberation, U.K. authorities announced they will remove oversight of Libor from the British Bankers Association and put it under government regulatory authorities.

But governance is not the only problem with Libor. The fact is that banks have virtually ceased making unsecured loans to each other so that Libor is pretty much a total fiction.

For this reason, Gary Gensler, chairman of the Commodity Futures Trading Commission, the U.S. agency responsible for regulating swaps, suggested in a speech last month in London that it is time to find a benchmark rate that is more honest in spite of Libor's widespread use.

"It's best that we not fall prey to accepting that Libor or any benchmark is 'too big to replace,' " he told an audience of regulators and bankers.

Last month's annual report from the Financial Stability Oversight Council — the interagency body set up in the U.S. in the wake of the financial crisis to identify and defuse potential threats to the global financial system — listed the damaged integrity of Libor as one of the major potential risks it is currently worried about.

Calling attention to the dearth of any actual transactions at this "interbank" rate, the report warns, "This situation leaves the financial system with benchmarks that are prone to and provide significant incentives for misconduct."

Gensler documented the fictitious nature of Libor for his London audience in a series of slides comparing bank credit rates during the recent crisis over a possible exit by Cyprus from the euro.

While other measures of credit for international banks, such as the cost of credit default swaps for these institutions, were swinging widely during this period, the banks' submissions for Libor remained unchanged.

"One might have thought the two would have had some relation to one another," Gensler said.

What Gensler and the FSOC want is a benchmark set by on observable process anchored in a real market. For instance, while many adjustable-rate mortgages in the U.S. are based on Libor, others use much more widely based or verifiable benchmarks, such as the cost of funds index (COFI) from the San Francisco Federal Reserve or the one-year constant maturity Treasury (CMT) based on an average of yields on Treasury securities.

However, not only are the big banks resisting any change, authorities in the U.K. are dragging their feet on scrapping Libor, arguing that improved governance will help and that a change of this scope would be disruptive.

The U.K. wants at all costs to maintain London's role as a hub of global finance. Financial and related professional services employ some 2 million people in the U.K. and account for nearly 15% of the country's GDP, more than in any other industrial country.

So London is showing little sense of urgency even in making the move to better supervision, let alone finding suitable alternatives.

If borrowers and pensioners here are to be protected from further losses due to fraudulent manipulation of this key rate, it will be up to U.S. authorities to keep pressing for alternatives, even if they have to do it alone.

Source: http://www.usatoday.com/story/money/business/2013/05/14/delamaide-column-libor-scandal/2158085/

How Rigged Are The Markets? Libor, ISDAfix And Now The Oil Price...

It seems that news about the fixing of trillion dollar markets is becoming, well, rather routine. First there was Libor, then there was the announcement that the Commodities Futures Trading Commission (CTFC) was investigating the possible rigging of the interest rate swap rate, another market in the hundreds of trillions. Then in mid-April the EU announced that it was investigating possible price manipulation in the $165 trillion physical-oil market. That's three price fixing scandals slap bang on each other's heels, all involving trillion dollar markets.


The public has not yet got worked up about the first two since the instruments involved are so far out of the ordinary person's view that the response, if you stopped someone on the street would be, "Sorry, never heard of it..." The alleged oil price scandal, however, could strike a lot closer to home. Motorists around the world are already furious over the cost of petrol and diesel at the pumps. While the vast majority of them probably feel that the oil companies are profiteering, the general feeling seems to be "Oh well, thing are as they are..." But if it transpired that instead of just being opportunistic, some of the major oil companies were actually involved in criminal activity things could get ugly.

Being a banker was almost a dangerous career to be in, for a few years after the smash, and bankers are not wholly out of the woods yet. Being an oil company executive could soon attract similar opprobrium if the EU investigation turns up any wrong-doing. A hate campaign against the oil companies, in a world that continues to run on oil and gas despite the strides being made in renewables, would not be a good thing.

The EU began with an investigation into possible price fixing by Royal Dutch Shell, BP and Statoil, three of Europe’s biggest oil exporters. According to Bloomberg EU investigators have now asked Neste Oil, Finland’s only refiner, to provide them with information regarding the potential manipulation of global crude and biofuels markets. Bloomberg also reported that Pannonia Ethanol, a Hungarian bio-fuels producer, has lodged a complaint with the European commission after it was denied the opportunity to contribute to the price setting process carried out by data-price setting company, Platts. There is plenty of speculation that the EU investigation will widen out pretty rapidly once the investigators start going through oil company emails and memos. Neste has said it is not a target of the investigation but will provide information into the investigation. Refineries, as major buyers of crude, are in a good position to know if they have been facing price fixing by supposed competitor suppliers, so their contribution is bound to be at least interesting.

Source: http://seekingalpha.com/article/1449461-how-rigged-are-the-markets-libor-isdafix-and-now-the-oil-price?source=google_news

Investigation Into Oil Industry Price Rigging Mirrors LIBOR Scandal

The European Union is investigating price-rigging in the global oil market, a widely-known yet unaddressed problem. That investigation hit a peak with last Tuesday’s raids of British Petroleum, Royal Dutch Shell, and Statoil offices. By the end of the week, Sen. Ron Wyden (D-OR) asked the U.S. Justice Department to undertake its own investigation into the effects on U.S. consumers.

Day-to-day oil transaction prices are based on benchmarks set by private firms, and the EU investigation focuses on the firm Platts, whose oil price benchmarks are “the most influential,” according to CNN Money. By manipulating individual transations late in a given day, traders can tweak the next day’s benchmark to increase their profits on other deals.

This looks to be very similar to last year’s massive, under-covered LIBOR scandal, in which megabanks colluded to gear a supposedly market-driven interest rate toward their own interests. CNN Money explains the shared pitfalls of basing daily price-setting on voluntarily-provided, unaudited data from the biggest players in the two industries:

“[T]hey are both widely used benchmarks that are compiled by private organizations and that are subject to minimal regulation and oversight by regulatory authorities,” the review, led by former financial regulator Martin Wheatley, said in August . “To that extent they are also likely to be vulnerable to similar issues with regards to the motivation and opportunity for manipulation and distortion.” […]

There are also concerns about the fact that reporting to Platts is done by traders voluntarily. In a report issued in October, the International Organization of Securities Commissions — an association of regulators — said the ability “to selectively report data on a voluntary basis creates an opportunity for manipulating the commodity market data” submitted to Platts and its competitors.

LIBOR manipulation impacts $800 trillion in assets globally. Similarly, oil prices are a core driver of the price of nearly every consumer good, especially food. LIBOR manipulation helped force massive cuts to public services in American cities by blowing up the balance sheets of those cities, and the apparent manipulation of oil prices is likely to have a similarly long and destructive reach.

The shared features of the LIBOR scandal and the burgeoning price-rigging investigation in the oil industry suggest a policy lesson: Left to themselves, the biggest industries in the world tend to cheat in their own interests, at great cost to consumers.

The LIBOR scandal, regarded as the largest financial fraud scandal in history, led to over $2.5 billion in fines and forced changes in the U.K. Under a law passed earlier this year, the process by which LIBOR is set will receive tighter government oversight from a new agency. But that change is insufficient, according to the American head of the Commodities Futures Trading Commission, and fraud remains a possibility.

These structural incentive problems crop up in myriad other markets. Finance expert Barry Ritholtz has a roundup of dozens of other types of market manipulation by insiders, far beyond oil and LIBOR. Privately and voluntarily generated core prices tend to discourage competition at the expense of consumers, as economist Costas Lapavistsas argued earlier this year in the Financial Times. “The answer,” according to Lapavistas, “is public intervention in the rate-setting process, whether through the central bank or otherwise.”

Source: http://thinkprogress.org/economy/2013/05/20/2036101/investigation-into-oil-industry-price-rigging-mirrors-libor-scandal/?mobile=nc

Mis-sold Interest Rate Swaps Deadline Imminent

Time is running out for bringing a court claim against banks for the mis-selling of interest rate swaps according to Lucy Baker, commercial litigation solicitor at Brabners Chaffe Street in Manchester.



On 31 January 2013 and 14 February 2013 the Financial Services Authority published updates regarding the mis-sold interest rate swaps by banks including Barclays, RBS and Lloyds Banking Group.

The report revealed the FSA's findings from the pilot reviews completed with Barclays, Lloyds Banking Group, RBS, Natwest, Allied Irish Bank, Bank of Ireland, Co-operative Bank, Clydesdale and Yorkshire Banks.

The FSA reviewed the sale of around 40,000 interest rate hedging products and found that over 90% failed to comply with one or more of the FSA's regulatory requirements. It has also added new criteria to the test of whether a customer is "sophisticated" or not.

In order to help small and medium sized businesses assess whether they fall within the review the FSA has produced a flowchart and guidelines to enable consistency from the banks with regards to redress, by attempting to put the customers back in the position they would have been in had the breach of regulatory requirements not occurred.

The FSA is set to announce its findings from the pilots of other banks who agreed to the review within the next few months.

The banks are aiming to complete the review within six months, however no guarantees have been given.

Small and medium sized businesses that bought interest rate hedging products commencing in 2007 will be approaching its six-year anniversary. In legal terms this means it will be approaching the limitation period under the Limitation Act 1980; any claim which is not brought within six years of the date of the hedging product commencing will be statute barred from pursuing court action.

Even if a company falls within the FSA scheme, it may wish to preserve its right to bring proceedings in the event that the proposals for redress that it recovers from its bank are unsatisfactory.

Barker suggests that any business which entered into an interest rate hedging product should take immediate legal advice, as there are protective writs and standstill agreements with the banks that can be entered into to stop time running out.

Source: http://www.placenorthwest.co.uk/news/archive/13363-mis-sold-interest-rate-swaps-deadline-imminent.html

Interest Rate Swap – An Unending Process

There are many financial derivatives that have threatened our banking and financial systems. Interest rate swap is probably the most important of it all posing a serious threat to the banks. You need to have the basic rights if you honestly want to understand the complexities of such an important derivative that affects our financial system in a large scale.


The Interest rate swap is nothing but a liquid financial derivative or more of an instrument that includes the exchange of interest rate cash flows between two parties. You should know that one of these parties in most cases is the bank itself, occasionally both parties being banks or other financial institutions. This is a lot more complicated to understand. So if you want to understand in simple terms, then it is just a kind of a agreement that different institutions like small businesses enter with banks just to protect themselves from the continuous change and market fluctuations in the interest rates.

In this process both the parties agree to pay fixed interest rates that are usually made under a common currency not a different one. Last few years have seen many new features being incorporated in the field of interest rate swapping, the major one being the exchange of rates based on different currencies. Banks make use of these rate swaps just for extending credit facilities to small business organizations. But this doesn't come without its disadvantages. It has been a subject of massive litigation giving rise to interest rate swap mis selling.

Small business organizations enter into such an agreement to protect themselves from the ever changing market. But the recent past has seen some serious exploitation on the part of top banks that have encouraged serious irregularities in sales practices adopted by these banks. As a result the small businesses are left crippled by this type of mis selling. Even they end up completely broke and nothing else to do.

Legally, the law enforcement is trying to bring order in this and have so ordered the top financial institutions the big names in the banking industry to properly compensate these small and hardworking business enterprises for these mis sellings. But this order is yet to be seen followed seriously by the banks. There have been penalties on the banks to do such thing but still mis selling are a thing that still thrives on. There is no place of trust in the equation contrary of the time when trust was most important in banking relations.

For customers (small time business owners) have ensued a battle for this injustice. Many have rather tasted success in winning and getting the money back. Yes they have thwarted the plans of the banks and get the right amount of compensation. Law enforcement has been strict and massive but still the interest rate swaps are going on and businesses are still being prey to such banks. Though the law regulations have become somewhat strong, the banks still find a way to do such things and still evade the law.

Source: http://www.articlesbase.com/law-articles/interest-rate-swap-an-unending-process-6497003.html

The Interest Rate Swaps Scam: Has Your Small Business Experienced Financial Difficulties?

Within the past year, the interest rate swap scam has received a great deal of attention and with good reason. Once again banks were misleading customers by selling financial products that were highly complex whilst carrying a great deal of risk. Has your small business experienced difficulties as a result of the

interest rate swaps scandal? If so, perhaps the following information may help you claim redress.

LIBOR Rate Fixing Is at the Root of the Scam

Unlike other countries in the Western World, the UK’s interest rates are set by high street banks. Whereas the United States and the EU have a central bank that sets rates, interest rates are calculated based on what the major banks are charging at any one period of time. There are twelve separate ways in which rates fluctuate and this only adds to the complexity of the problem. The Financial Services Authority (FSA) is well aware of the fact that the average small businessman is highly unqualified to make an educated decision on whether or not to purchase this product alongside a commercial loan.

It is the FSA’s contention that high street banks were fully aware of this and that they knowingly continued mis selling interest rate swaps as a packaged deal with commercial loans to unsophisticated customers who had no way of calculating the risks involved.

Escalating Number of Interest Rate Swaps Complaints

As in the case of mis sold payment protection insurance, small businesses are able to make a claim of mis sold interest rate swaps and compensation as well. The problem is that SMEs are operating at a disadvantage when it comes to tackling savvy high street banks. A small business may have an accountant or the services of a solicitor, but the key players in the scam, high street banks, are represented by teams of the world’s best lawyers. If you have been mis sold interest rate swaps in tandem with a small business loan, you may not know where to turn for help.

Real Business Rescue is more than an insolvency service. Our team of financial advisers and insolvency specialists are able to help you determine if you have fallen prey to the interest rate swap scam. We can help put you in touch with the right specialists who are able to take on the big guys and beat them at their own game.

If you have experienced financial distress due to losses incurred from interest rate swaps, we can help make that right. Give us a call on 0800 231 6040 to learn what you can do to be compensated for those losses and to recover what was lost in high interest payments.

Source: http://www.realbusinessrescue.co.uk/articles/interest-rate-swaps/interest-rate-swaps-scam

The Disadvantage of the Interest Rate Swaps

The disadvantages of interest rate swaps Interest rate swaps are financial instruments used by big investors. The interest rate swap is a financial mechanism used by investors, manage risk and speculation of future market performance. Interest rate swaps, an investment group committed to pay a fixed interest rate and a variable interest rate in exchange for the same amount of money to invest to another. This allows speculators to help other investors to consolidate its investment.


Disadvantages of interest rate swaps others are reading to exchange debt for equity risk survey of rate increases return on investment due to floating interest rates fluctuate with the market, they are more difficult to manage than the fixed-rate investments. Fund managers frequently exchange floating interest rates for fixed rate interest rate swaps to lock in the rate, and allows planning. If the terms of the floating interest rate rise in the interest rate swaps consultation, the original owner of the amount of flow lost increased interest income to boost prices, but only the difference between the agreed rate out of each other in floating. For example, if in a 6.7% interest rate swap negotiations, the floating rate rose to 6.9%, the original investors in non-interest bearing 0.2% interest rate differentials.

Speculators the rate speculative investors trading the predictability and safety of fixed-rate revenue stream flow forecasting interest rates will rise in floating interest rate volatility, the more lucrative investment value of floating rate over the initial fees. If the floating rate decreased to reduce the investment value of speculators, investors lose money. For example, a thousand dollars floating rate flow down to 6% (pay an annual value of $ 60) resulting in a net loss of 5 dollar speculators transactions per year interest rate of 6.5% revenue streams (worth $ 65 a year) 1,000 a Australian dollars.

Currency fluctuations, interest rate the swap mechanism more complex form of transaction value of the two currencies interest rate and currency combination. These strategies bring the same investigators and the risk of speculators – whether it is to lose the extra income the value of one currency rises or lose money when it falls – foreign currency exchange and interest rate forecasts, making the international interest rate swaps period a complex proposition.

Source: http://www.howmoneyarticles.com/archives/20130407/the-disadvantage-of-the-interest-rate-swaps.html

Interest Rate Swap, IRS

Interest rates swaps (IRS) are instruments for managing interest rates that may be of great use for companies who have liabilities with floating interest rates. Interest rates swaps allow safeguarding your company’s cash flow against interest rate fluctuations by exchanging the floating rate with the fixed rate.

Swaps may be used in combination with any financing irrespective of whether it’s from Swedbank or any other lender. Your loan will still be based entirely on the contract between you and your lender.

This instrument only affects the reference rate of your loan (such as EURIBOR, LIBOR). The entry into or termination of a swap transaction will not in any way affect the fees agreed in the loan agreement (e.g. for early repayment of loan or changes in repayment schedule) or any other arrangement between you and your lender.

Possibilities:

• locking in the interest rate for the entire or any part of your loan period;
• locking in the interest rate for the entire or any part of the amount of your loan;
• locking in the interest rate on a new or an existing loan;
• including personalized amortisation schedule;
• altering, extending or terminating the interest rate swap transaction without any effect on your loan agreement.

Advantages of using interest rate swaps:

• greater certainty for future liabilities;
• reduced credit risk and potential costs for the company;
• no fees or charges.

Risks associated with interest rate swap transactions:

• once the rate is locked in through interest rate swap, you lose the chance to benefit from falling interest rates on the market;
• in case of early termination of the transaction, the customer may incur expenses or earn income, the size of which depends on interest rate market situation then prevailing.

Requirements:

• holding a current account with Swedbank,
• signing the Agreement for Financial Market Transactions with the bank.

Source: https://www.swedbank.lv/en/pakalpojumi_uznemumiem/procentu_likmju_ierobezosanas_instrumenti/

New Zealand Farmers Left High and Dry

At the height of the global economic boom foreign-owned banks exploited their close relationships with rural New Zealanders, to sell billions in loan products that have brought hundreds of farmers to their knees.


Called interest rate swaps the complicated derivative products were aggressively marketed to farmers from around 2005 to 2008, as similar to fixed-rate loans but with "benefits".

Heralded as an answer to soaring interest rates, thousands of farmers took up the loans despite many having little understanding of what they were getting into.

That ignorance soon took its toll. When the the global economy collapsed in 2008 and the cost of borrowing skyrocketed, banks hiked up charges on the loans and enacted break fee clauses of millions of dollars, trapping farmers into paying interest as high as 14 per cent, even when rates sank to less than six.

Labour's spokesman for Primary Industries, Damien O'Connor, believes swaps have the potential to be New Zealand's biggest banking scandal, involving thousands of farmers and as much as $8 billion in loans.

The bulk of these were believed to have been made by the National Bank, which has now merged with ANZ. ASB, BNZ and Westpac are also understood to have sold swap loans in the past and continue to do so to select customers.

On Wednesday a spokesperson for the ANZ said interest rate swaps were one of a number of products it offered to farming businesses to manage their interest rate risk.

All customers were advised to seek independent advice before entering into a swap to ensure they fully understood the product, the bank said.

Unfortunately, advisers to farmers often didn't understand the swaps. One former banker told the Taranaki Daily News young bankers didn't understand the product either. However, this didn't stop them collecting annual bonuses of as much as $50,000 and more for getting farmers into swaps and other profitable loans.

When things started to go wrong the local bank employees who sold the product, and may have felt an obligation to make things right with the customers who trusted them, were replaced by a banker from outside of Taranaki.

Just how many farmers have been caught out by the swaps is impossible to know, although the Daily News understands as many as 200 farmers may be affected in Taranaki.

Some have already done deals with banks that have gagged them from speaking out, while others fear going public because of veiled threats it would wreck their own chances of reprieve. Still more are understood to have been forced to sell up before receivers were appointed.

"It was a wonder product they said. They said it would fix everything and when it didn't they just wouldn't budge," says Awakino's Angela Potroz.

In November Mrs Potroz, 63, and her husband John, 69, paid the ultimate price for taking on a National Bank swap in 2007. Last year they say they were forced to sell four sheep and beef farms with a 2010 valuation of $18.85m for $12.08m, when the bank demanded their $11m swap be repaid in full.

The couple say for four of the five years they held a swap they were caught in a living hell of increasing repayments and dwindling income. With repayments, fees and other charges sometimes getting close to $100,000 a month, they barely had enough to run their farms - let alone pay the break fee of $3 million to get out of the swap.

Throughout their slow ruin the couple say the bank refused to refinance the swap. By their own estimates the loan cost them up to $4m more than they had budgeted for when they took it up in 2007.

"We have been totally robbed. We have been robbed and treated badly by the people who should have helped us," Mrs Potroz says.

They were not alone. The Commerce Commission is investigating swaps, following allegations from around 60 farmers that they were mis-sold the product and it was promoted in a misleading way.

"This is a very complex investigation and we are at an early stage. We have not yet formed a view as to whether the Fair Trading Act has been breached. However we do have sufficient concerns that we wish to probe further," Commerce Commission chairman Mark Berry said on Wednesday.

For farm debt mediator Janette Walker the outcome of the investigation should be a foregone conclusion. Banks were wrong and farmers should be compensated, just as has happened in Germany and is happening in Britain.

Farmers were not told what they were getting into, she claims, and were manipulated by people they trusted.

"The whole thing was based around relationships. Farmers have banked with these banks for 30-40 years. So they never expected to be done over by their bank.

"I talked with one farmer who took swaps and has had to sell almost everything.

He used to go hunting with his manager. He used to go fishing with him.

He trusted what he was being

told by him and he did not expect to be shafted."

And far from farmers approaching the banks for the money, it was the banks that solicited farmers - offering the swaps as the only sensible option in a booming economy to protect against interest rates rising.

If the way banks sold swaps wasn't illegal it was unethical, says Mr O'Connor.

"It's not the financing so much, it's the overcharging, the break fees and the additional profit they made over and above what they would have on the traditional finance products they sold to farmers.

"I think the banks need to come clean and build a new and fresh relationship."

Quite how many farmers banks need to make peace with will get harder and harder to know.

Mr O'Connor says banks are offering some farmers refinancing, with the caveat they sign confidentiality agreements.

"Absolutely this is evidence banks recognise they have made a mistake," he says.

It could be more than that. It could be the biggest scandal to ever hit New Zealand banks, he says. "From my calculations this is probably the case, but until we investigate more fully we are only guessing."

Source: http://www.stuff.co.nz/taranaki-daily-news/news/8489046/New-Zealand-farmers-left-high-and-dry

A Guide to Interest Rate Swaps Redress and Compensation

As the scandal escalates over mis sold interest rate swaps more and more businesses are wondering if they have been mis sold this highly complex hedging product by their banks and if so, are they entitled to redress? Directors of SMEs are looking for a guide to interest rate swaps not so much to understand what they are, but rather how they can reclaim money they shouldn’t have paid.


If you took out a commercial loan on or after 1 December, 2001, you indeed may have purchased some form of hedging product as a condition of the loan. Claiming redress will not be as easy as it should be, primarily because of the complexity of the product, but the place to begin is with a basic understanding of exactly what interest rate swaps (IRSs) are.

A Brief Synopsis of Interest Rate Swaps

Fundamentally, interest rate swaps are sold alongside a loan so that the borrower can be protected against future rises in interest rates. It is a separate financial contract to the underlying loan in which floating rates are swapped for fixed rates. In theory, a floating rate would rise if the current interest rate rises. This would increase the customer’s payment accordingly.

Banks knew that customers don’t want their interest rates to rise so they sold them an interest rate swaps package to ‘protect’ them against rising costs. It is the contention of many customers who purchased these packages that they were unaware of the costs associated with the IRS. The complexity of repayment calculations was far beyond the scope of their understanding and they were certainly unaware of the enormity of exit penalties.

Unfortunately, further confusion rests in the fact that there are more than just simple interest rate swaps which were sold and some customers weren’t advised of the risks they would be taking on. There may have been a better hedging product to suit their needs and banks weren’t forthcoming with that information.

The Financial Service Authority’s Involvement in Interest Rate Swaps

As a result of literally thousands of complaints, the Financial Service Authority (FSA) began to evaluate the situation. As recently as this year, they revised how banks were to review any IRS sold after December 2001 and how to handle those sales that merited financial redress. The FSA appointed independent reviewers who would oversee each bank’s review in order to assure unbiased reviews of any claims.

In order to do this, the FSA had to establish guidelines to go on. The main aspect of interest rate swaps reviews is in determining whether a business customer was sophisticated or unsophisticated. To put it plainly, did a business have the acumen to understand these complex hedging products before being sold the package?

There are several ways in which the FSA sees a business as being unsophisticated such as whether they had fewer than 50 employees, an average of full and part-time workers. As well, the FSA looked at the company’s balance sheet and their annual turnover – but even these have shades of grey since other factors needed to be considered as well.

Complications in Claiming Redress and FSA Revisions to Review Criteria

Banks that agreed to the pilot review in the summer of 2012 (Lloyds, Barclays, HSBC & RBS) began reviews based on the criteria set forth by the FSA. They looked at when the IRS was sold and whether or not the customer was considered sophisticated or unsophisticated. Unfortunately, this opened up a number of appeals which they then had to consider.

For example, a business could be considered unsophisticated according to size and annual turnover but might be savvy enough to have a solid understanding of hedging products. On the other hand, a business with employees numbering over the 50 mark cutoff could have a majority of workers only on the job seasonally.

At the moment, the FSA is taking these things into consideration and as of March 2013, banks will need to make reviews based on these revisions. Then there are also a great number of questions which needed to be addressed such as what to do with interest rate swaps that were mis sold to companies that have been wound up.

It is the finding of the FSA that companies no longer on the register are no longer considered to be entities. Consequently, these companies are not entitled to redress or compensation for any losses incurred due to mis sold interest rate swaps.

In their most recent publication dated 13 March 2013, Interest Rate Swaps Questions, the FSA suggests that there are a number of extenuating circumstances that should be considered under appeal. Any business that feels a review by the bank is incorrect should get legal representation to file an appeal with the court. Micro enterprises (fewer than 10 employees) may file an appeal with the Financial Ombudsman Service.

Source: http://lawactually.blogspot.com/2013/04/a-guide-to-interest-rate-swaps-redress.html

Uh Oh: The Attempt to Regulate Swaps Is Failing

It's hardly surprising to hear that some of the largest derivatives brokerages are looking to set up futures exchanges. A huge portion of the traditional business these brokers did is in the process of migrating out of swaps and into futures.

Traders in the 30-year bond options pit in Chicago

The driver here is financial reform. The actual rules are still being worked out by regulators at the CFTC and will likely run hundreds of pages. But the main things the Dodd-Frank bill did was require that standardized swaps be traded on exchanges, be cleared through clearing houses, and be subject to regulatory supervision. In other words, standardized swaps wind up being a lot like futures.

"Once these 3 things are done, standardized and standardizable swaps become virtually indistinguishable from futures type contracts," MIT economist John Parsons explains on his blog, Betting the Business.

Another thing driving the flight to futures is the fear of being tagged as a swaps dealer. A CFTC rule that went into effect in October requires that anyone who trades more than $8 billion of swaps a year be treated as a swaps dealer for regulatory purposes, which means government audits and capital requirements. So if you were an airline or a hedge fund or an energy company doing a lot of swaps trading, you went scrambling to find a futures contract to take the place of a swap.

There's also the collateral difference. The CFTC now requires traders to post margins equal to five days worth of maximum potential trading losses for interest rate swaps and credit default swaps. If you use futures contracts, however, you only need to post collateral worth one or two days of potential losses.

Finally—and most importantly—there's Basel III. Under the new capital requirements, it is substantially more attractive to use futures for risk management than swaps. When the CME group looked at this it found that the Basel III capital requirements for a cleared plain vanilla interest rate swap with a 2-year maturity and a notional size of $10 million would be $87.92 for the paying fixed side of the swap and $148.93 for the receiving fixed side of the swap. By contrast, getting the equivalent interest rate protection with a futures contract would require just $61.02 of capital. (As always, capital requirement math is complex and boring but here's a link to the CME paper if you are really curious.

The flight to futures has already happened in energy, where a large part of natural gas and the electric power market has jumped from swaps to futures. Interest rate futures are being offered by the CME Group and Eris Exchange. Intercontinental Exchange will soon roll out credit index futures—that is, futurized credit default swaps.

This is a bit frightening if only because this wasn't something anyone really understood would happen. It looks obvious and inevitable now but no one voting for Dodd-Frank ever said: "Hey! Let's do a de facto elimination of standardized swaps and give lots of business to the big futures exchanges." This is, if not totally unforeseen, at least an unintended consequence of Dodd-Frank.

This means that the implications of the change—which, again, is happening very quickly—are not well thought out. For one thing, it appears to increase the market power of the major futures exchanges. Centralization and concentrated market power are sources of fragility in a financial system.

Robert Litan, the director of research at Bloomberg Government, pointed to one specific problem in his ground-breaking note on the futurization of swaps.

Dodd-Frank has created other regulatory differences between swaps and futures, with more user protections for swaps than futures. One area of attention involves segregation of customer funds, which has been inadequate in the futures arena, as demonstrated in the failure of MF Global. If credit default and interest rate swaps can be easily cross-dressed as futures, these other business-conduct protections (such as those applying to "special entities" such as schools and municipalities which in the past have been victimized by interest rate swaps that were ill-suited for these customers) will prove meaningless.

Litan also points out there is less transparency in futures pricing than there would have been on the swaps exchanges Congress mandated in Dodd-Frank. The futures exchanges claim to own the pricing information, which means it isn't freely available to the public. What's more, a lot of the trading in futures is done over the phone, outside of the transparent exchange book. This means that the same problems of price opacity that Congress was trying to address by moving derivatives to exchanges will persist.

And then there's this:

Dodd-Frank encouraged competition in the swaps market by allowing contracts to be executed and cleared at different companies. For example, a swap bought on Tradeweb could be cleared at LCH.Clearnet Group Ltd., CME Group or Intercontinental.

In contrast, futures trading and clearing can only be done at the same company, allowing Intercontinental and CME Group to wall off their energy clearing from rivals.

So we end up in a world with less collateral and less capital, less transparency, less investor protection, more concentration of risk, and a huge unanticipated market transformation. All in the name of regulating swaps.


Source: http://www.cnbc.com/id/100620473

What are Interest Rate Swaps? How do IRSA’s work?

Interest rate swaps are common especially with large financial institutions. Swaps are mostly unregulated and do not trade on public exchanges but as over-the-counter derivatives. Most members of the public do not know about Swaps.


Interest rate swaps are agreements between institutions to exchange cash flows. However, in some swaps, the difference is not in the interest rate but the currency. In practice, interest rate swaps are more complicated and may involve a simultaneous variation of interest rates, currencies and other variables.

Interest rate, also known as swap rate, has a close relation with prevailing interest rates applied to a country’s currency deposited in other institutions that do not belong to that country. Swap settlement is implemented with the exchange of would-be payments from two parties rather than the principal.

Types of Interest Rate Swaps

Trading Swaps

Generally, there are three steps involved when trading swaps. The first step is making a choice on the maturity date. This is referred to as picking a point along the yield curve.

Interest rate swaps have a tendency to vary depending on the maturity. The second step is to determine the vehicle that is being hedged out. The third step is choosing the direction of the trade.

Parties hedging against an increase in interest rate swaps will make different trades than those expecting lower rates. There will also be a difference in how parties trade when they expect too much exposure on a single currency. Once the three steps have been followed, determining the value of a swap in money markets and futures contracts is a completely new game.

Benefits of Interest rate Swaps

Avoid Foreign Exchange Controls

Many countries regulate currency swapping to boost their domestic economies, keep currencies in their country and avoid devaluation. The regulations determine how much a trader can exchange for a foreign currency.

Multinationals developed interest rates swaps as a means of preventing foreign exchange controls. This allows traders to trade interest rates from one form of currency to another. Interest rates swaps provide businesses the opportunity to raise capital in a foreign market without extending their debts in the foreign country.

Speculative Investment

Speculative investors depend on fixed-rate swaps as a tool for placing bets on interest rate fluctuations. During the initial structuring of an interest rate swap, the commitment of each party is valued the same. As the interest rates change, the value of the interest rate swap also adjusts with rate changes. This makes the floating-rate payment amount go up or down according to the market forces. When traders believe interest rates will fall, they look to exchange floating rates for fixed rates. On the contrary, if speculators predict a rise in interest rates, they exchange fixed rates for floating rates.

Risk Management

Many investors with large holdings in floating-rate investments use interest rate swaps to take off the risk from some of their portfolios. They do this by trading floating-rate investments for secure fixed-rate ones. This helps the investors to get a measure of stability that floating-rate investments cannot offer. Investors use the gains offered by fixed-rate mechanisms as a reliable tool for managing their investments.

Businesses use swaps when the parties in a swap can access debts that the other cannot. For example, companies that need fixed interest rate but can only access floating interest rates can swap with other companies in the converse situation.

Cost

Large businesses use interest rate swaps to lower costs. Swaps are cost effective because they have fewer fees than other forms of debts. The cost effectiveness of swaps can be improved further if cash-outflow costs are offset by advantages of a variable inflow that is half of the swap.

Many companies look into interest rates when they have a combination of liabilities that charge interest rates and assets that pay fixed interest rates. When a company swaps with that on the opposite side, it is in a position to manage its capital to match up expenditures.

Profit

Interest rate swaps from fixed and variable rates help maintain company profits when interests on debts increase. The profits can be higher if cash outflows remain fixed. As the variable rate rises, the profitability of the interest rate during the period also increases. Though this practice is mostly speculative, it contributes to lower project management costs and higher returns.

Typical Interest Rate Swap Terms

Two parties negotiate and, depending on current economic conditions and interest rates, one of the parties will have to pay above the usual rate to get the deal done. The two parties set the duration of the swap, which may vary from 1-15 years. Settlements dates are then set after which the settlement period begins.

Settlement Dates

This refers to the period when the settlement period ends and the party whose end of the swap loses starts to pay up. Typically, no money changes hands until the settlement period ends. During the settlement date, the party with a higher interest collects the difference from the one with a lower interest.

Interest Rate Swaps Basics

With fluctuating economies and different trends in the financial sector, many creditors and financial institutions are using interest rate swaps to meet the demands of the changing investment climates. However, lenders may be losing on the opportunity to make money due to unnoticed swaps. Here are tips on how to discover swaps and prevent losses when trading.

• Know the terms of the swap agreement. Traders should find out what are the applied interest rate and the terms set to determine how and when original interest rates are swapped for larger ones i.e. what may cause an increase in the interest rate. Once the trigger factors have been determined, traders should request immediate verbal notification. By law, traders have a right to receive a written notification of an interest swap.
• Find out if a generic fixed-to-floating interest rate at a line of credit or start of a loan was assigned. Fixed rates cannot be changed unless borrowers are subject to prepayment or non-payment swap-based fee. Traders should negotiate for a longer fixed rate period if possible.
• Traders should also know their credit scores. People with high credit scores are less likely to get an interest rate swap than those with bad credit.
• Traders who miss on payments should immediately find out the interest rate determined on their statements or quarterly invoice. Traders should also monitor each line of credit after a decline in the credit score.

Considerations
Parties in a swap trade do not normally complete their swap option agreement directly with each other. Each party in a swap agreement uses a swap account with a bank or broker to complete transactions. The agent’s payment is made by deducting the difference between the sales and offer price levels. Though the spread on a trade may be quite small, it accumulates to an attractive fee when calculated on large notional amounts.

Risks
There are certain risks associated with interest rate swaps. The most notable is that swaps tie up companies’ fortunes into a single investment vehicle. In case one of the parties defaults on payment, the other party loses money. In addition, when company’s fortunes are badly managed, it may create a tough financial situation that may make it default payments. The effects of the payment default can reverberate through the entire market.

Interest rate swaps provide companies the opportunity to work together for mutual benefit. They do this by providing one another access to more affordable debts and by using each other’s rates to hedge against changes in interest rates.

Source: http://www.maplefinancial.co.uk/what-are-interest-rate-swaps-how-do-irsas-work/

Dollar-Funding Stress Eases, Money-Market Indicators Show

Money-market indicators signaled levels of short-term dollar funding stress eased.


Three-month London interbank offered rate, or Libor, which represents the rate at which banks say it would cost to borrow from another, fell for the third consecutive day to 0.2811 percent from 0.2821 percent yesterday, according to the British Bankers’ Association. The Libor-OIS spread, a gauge of banks reluctance to lend, widened to 14.5 basis points from 13.9 basis points.

Overnight index swaps, or OIS, give traders predictions on where the Fed’s effective funds rate will average for the term of the swap. The central bank’s target rate is set in a range of zero to 0.25 percent.

Predictions in the forward market for Libor-OIS, known as the FRA/OIS spread, fell to 18.5 basis points from 20.3 basis points, according to the second rolling three month contracts.

The difference between the two-year swap rate and the comparable-maturity Treasury note yield, known as the swap spread, narrowed 0.63 basis point to 15.92 basis points. The gap is a gauge of investors’ perceptions of U.S. banking sector credit risk as swap rates are derived from expectations for dollar Libor.

Swap rates serve as benchmarks for investors in many types of debt, including mortgage-backed and auto-loan securities.

The seasonally adjusted amount of U.S. commercial paper rose $5.3 billion to $1.0216 trillion in the week ended March 27, according to Federal Reserve data.

Euribor-OIS Spread

The cost for European banks to convert euro-denominated payment streams into dollars-based funding via the cross currency swaps market decreased. The three-month cross-currency basis swap was 17.7 basis points below Euribor, compared with 18.2 basis points below yesterday.

Foreign-exchange swaps are typically for periods of less than a year, while cross-currency basis swaps usually range from one to 30 years. The latter are agreements in which a person borrows in one currency and simultaneously lends in a different currency. The trade involves the exchange of two different floating-rate payments, each denominated in a different currency and based on a different index.

The Euribor-OIS spread, the difference between the euro interbank offered rate and overnight indexed swaps, was little changed. The measure of banks’ reluctance to lend to one another was 12.9 basis points.

Repo Rates

The overnight Treasury general collateral repurchase agreement rate opened today at 0.18 percent, according to ICAP Plc, the world’s largest inter-dealer broker.

The average rate for borrowing and lending Treasuries for one day in the repo market was 0.179 percent yesterday, according to a GCF repo index provided on a one-day lag by the Depository Trust & Clearing Corp.

Securities dealers use repos to finance holdings and increase leverage. Securities that can be borrowed at interest rates close to the Fed’s target rate are called general collateral. Those in highest demand have lower rates and are called “special.”

The average rate for overnight federal funds, known as the fed effective rate, was 0.15 percent yesterday. The rate opened today at 0.15 percent. The effective rate is a volume-weighted average of trades between major brokers for overnight funds, reported on a day lag by the Federal Reserve Bank of New York.

Source: http://www.businessweek.com/news/2013-04-03/dollar-funding-stress-eases-money-market-indicators-show

Council Argues Against Interest Swaps

The controversial property assessment program Actual Value Initiative – AVI – took a brief backseat during Thursday’s council meeting, as members and community stakeholders threw their collective weight against another perceived scourge: the city’s penchant for entering into risky rate management agreements commonly referred to as “swaps.”

Councilman Jim Kenney’s resolution, which passed through council with a unanimous vote, urges the Pennsylvania Senate to enact Senate Bill 293, which would block all municipalities throughout the Commonwealth from entering such agreements.

SB 293, introduced in February by Sen. Mike Folmer and cosponsored by Sen. Dominic Pileggi, has been referred to the Senate Local Government Committee.

Pennsylvania Auditor General Jack Wagner has long been a critic of the tactic. According to Wagner, a swap is a financial contract between two parties betting on which way interest rates will move. The party that guesses correctly gets paid and the party that guesses incorrectly must pay the other party. The amount of cash being swapped is determined by the size of the debt being financed by bonds with variable interest rates. Wagner in January released a report on the Pennsylvania Turnpike Commission’s involvement in interest-rate swaps has cost Pennsylvania taxpayers and turnpike motorists at least $108.9 million.

A 2009 investigation completed by Wagner’s office of the Bethlehem Area School District found that on a statewide basis, 107 of 500 school districts and 86 local governments had $14.9 billion in public debt tied to swaps. The numbers have since increased to $17.5 billion in public debt, encompassing 108 of 500 school districts and 101 local governments. In the process, millions of public dollars have been lost in interest-rate swap deals.

While economist James Foster testified that the city will lose an additional $240 million if it goes through with swaps, Philadelphia Federation of Teachers President Jerry Jordan spoke of the impact these swap deals had and continue to have on students.

“Swaps certainly have a huge impact on our schools and our students, and I am here today to urge you to support the resolution against swaps in Philadelphia and in the school district,” Jordan testified. “Teachers have become experts on the toll that cuts to education funding have taken on our schools and our children. Philadelphia has only 42 librarians for its 239 schools; we’ve seen the layoffs of 101 school nurses, which has put our children’s health at risk; 25 percent of our schools don’t have music teachers, and there’s been less support for English as secondary language learners.

“These are just a few examples of how the cuts in state aid have been structured to hit Philadelphia the hardest,” Jordan continued. “And the money that the school district has lost on swaps would be money that would put those monies back into those services.”

Of particular note, council also passed a bill that would change the interest and penalty rates for unpaid taxes.

Council President Darrell Clarke wouldn’t floor the Earned Sick Days Bill, intimating that since Mayor Michael Nutter has recently vetoed the bill, there wasn’t much council could do about it at its regular weekly meeting.

Councilman Bill Greenlee recently introduced the legislation, officially titled the Healthy Families and Workplace Bill, and council passed it in late March.

“I am heartened by the vote, and the expression by a solid majority of my colleagues that healthy workplaces and fairness for employees are good for Philadelphia’s economy. This is about respect for all workers, including low wage employees,” Greenlee said. “This also is about public health, and keeping those workers away from the general public when they come down with a communicable illness.

“Today is a great day for the more than 200,000 Philadelphia workers who will be eligible to earn paid sick leave.”

Even without gaining the floor to state their case to council, supporters of the bill – led by the Philadelphia Coalition for Healthy Families and Workplaces – held a press conference in the hallway leading to council. During that press conference, many proponents blasted the mayor’s veto as painful and shortsighted.

“Mayor Nutter’s veto shows that he has chosen to side with cooperate lobbyists instead of Philadelphia’s families who need and want earned sick time. Small businesses and economists alike support earned sick time, and the mayor’s position against the bill misses a real opportunity to get our economy on the right track for all Philadelphians,” said Pathways PA Senior Director of Policy and Media Relations Marianna Bellesorte. “When workers without earned sick days have to forgo a day’s pay, or worse, lose their jobs because they are ill, it affects all of us.

“We call on the city council, which has twice passed an earned sick days bill, to stand up to the corporate lobbyists, override Mayor Nutter’s veto and bring earned sick days to nearly 200,000 Philadelphians who currently are forced to choose between their financial security and their health.”

Source: http://www.phillytrib.com/newsarticles/item/8495-council-argues-against-interest-swaps.html

ICAP Probed by US Regulators Over Rate Fix

The FTSE100 broker issued a statement after it was reported that the Commodity Futures Trading Commission (CFTC) has issued subpoenas to Icap brokers as well as bankers at 15 Wall Street institutions to establish if they colluded to manipulate the ISDAfix rate.

Icap, the interdealer broker which sponsors the racing yatch
Leopard, aggregates data from banks to set the ISDAfix
which is now being probed by US regulators

The company said it was “co-operating with the CFTC’s wider inquiry into this area” but refused to comment on the specific action of its brokers.

The ISDAfix rate is formed when 15 banks submit bids and offers for swaps in a raft of currencies. Regulators started the probe into ISDAFix, which impacts global borrowing costs as well as the price of $379trillion interest-rate swaps, and other vital benchmarks in the wake of the Libor rigging scandal.

According to Bloomberg, the CFTC is planning to interview a dozen current and former brokers in Icap’s Jersey City office. The brokers at Icap, which is the biggest inter-dealer broker in the world, are responsible for matching interest rate swap trades between banks and are paid commission on the size of the deals. The swap desk at Icap’s Jersey City office is nicknamed “Treasure Island” because of its success, according to Bloomberg.

Icap’s annual report showed that $1.4trillion of transactions were trading through Icap’s systems last year.

In its statement Icap said it has “no knowledge of the allegations prior to the media speculation”. But a spokesman said this denial related to an allegation that brokers failed to up-date the rate-swap price after facilitating a trade between two banks. Icap said it did not know if its brokers were being investigated on this point but had opened an internal investigation into the matter.

Source: http://www.telegraph.co.uk/finance/newsbysector/epic/iap/9980794/ICAP-probed-by-US-regulators-over-rate-fix.html

India’s Swap Rate Drops to 25-Month Low on Rate-Cut Speculation

India’s one-year interest-rate swaps slid to the lowest in more than two years on speculation softening inflation will spur the central bank to cut borrowing costs for a third time this year.

Gains in benchmark wholesale prices slowed to 6.27 percent in March, the smallest increase in 40 months, according to a Bloomberg News survey before data due today. The Reserve Bank of India has lowered its benchmark repurchase rate by 50 basis points to 7.5 percent in two reductions this year. The next policy review is due May 3.

The one-year swap, a derivative contract used to guard against fluctuations in funding costs, fell two basis points to 7.36 percent as of 9:25 a.m., data compiled by Bloomberg show. That’s the lowest level since March 15, 2011.

“The drop in short-end swaps reflects increased rate cut expectations,” said Nagaraj Kulkarni, a Singapore-based strategist at Standard Chartered Plc. “The recent drop in global crude-oil prices also supports such expectations.”

Brent crude has retreated 17 percent from this year’s high of $118.90 a barrel touched in February. India imports about 80 percent of its oil. Consumer prices rose 10.39 percent in March, compared with 10.91 percent in February, official data showed on April 12.

The yield on the 8.15 percent government bonds due June 2022 fell two basis points, or 0.02 percentage point, to 7.85 percent, according to the central bank’s trading system.

Source: http://www.businessweek.com/news/2013-04-15/india-s-swap-rate-drops-to-25-month-low-on-rate-cut-speculation

South Korean Currency Swaps down As Foreigners Sell Bonds

The South Korean central bank's surprisingly hawkish monetary policy and persisting tensions over North Korea's nuclear threats are spurring foreign investors to pull cash out of Seoul's debt market.


Evidence can be seen in the cross-currency basis, which is the spread between currency and interest rate swaps and reflects foreign participation in Korean markets.

The Korean won currency basis, the main indicator of foreign investor sentiment on Korean assets, has turned more negative since mid-March, reflecting the heavy interest onshore in converting won to dollars.

The swaps basis also reflects the rise in interest rate swaps after the Bank of Korea surprised markets with its decision not to cut policy rates on April 11.

Foreigners normally pay the cross-currency swap (CCS) when they invest onshore, selling spot dollars for won and buying them back for a future date.

"The more negative the basis becomes, the more disadvantages existing foreign investors will have," said Yoon Yeo-sam, fixed-income analyst at Daewoo Securities.

"But the current level is not seen as showing panic because dollar liquidity is not seriously scarce here," Yoon said.

During the first two weeks of April, foreigners reduced net investment in South Korean bonds by 500 billion won ($446.17 million) and dumped 1.2 trillion won worth of stocks, according to a financial regulator.

The one-year basis stood at -89 on Tuesday, but not far from Monday's -94 of its lowest since July 12. The weakness reflects that the CCS has been falling since mid-March and has shed 44.5 basis points in nearly five weeks to reach 1.2550 percent.

Last week, the central bank kept its base rate unchanged at 2.75 percent. Its reluctance to cut rates in the face of political pressure has stoked expectations it will stand pat next month as well. That lifted bond yields, with the five-year yields rising on April 12 to 2.76 percent, a one-month high. Foreign investors have been selling treasury bond futures.

Interest rate swaps, which are derivatives used to hedge yield movements, have also risen.

The cross currency basis historically tends to turn negative during periods of risk aversion.

For instance, in November 2010 when North Korea bombed an island in the South, the one-year won currency basis fell to -204 basis points. The basis hit a record low of -267 in October 2011 when worries about Greece's fiscal crisis rattled global markets.

Compared with October 2011, the widening of the swap basis has been relatively muted in the past two months, possibly because market participants expect the Bank of Japan's new aggressive quantitative easing policy will drive more money into neighbouring markets such as Korea's.

But other factors are at play too, including that the Bank of Korea is suspected of providing dollar liquidity to stem a slide in the won, emerging Asia's worst performing currency this year. South Korean exporters' demand for the won has also reduced volatility in dollar/won forwards.

"The basis is not as negative as before because of the improved external position of Korea," said Frances Cheung, a strategist with Credit Agricole in Hong Kong.

"And if the basis gets quite negative, some foreign investors would actually be attracted back, for asset swap trades for example," she said, referring to trades where foreigners swap dollars for won investments.

Source: http://www.brecorder.com/business-a-finance/banking-a-finance/115415.html

Bill would Ban Interest Swaps

State Sen. Rob Teplitz, D-Dauphin, led the investigative unit in the auditor general’s office that exposed the widespread and costly bungling by school officials and local government officials involved in risky interest swaps.


At the time, Teplitz’s boss, Jack Wagner, called on the Legislature to ban the interest swaps. Bills were introduced in both the House and Senate but went nowhere.

Flash forward two years and Teplitz is elected senator, just as the full details of the debt debacle focused on the Harrisburg incinerator came to light.

Last week, Teplitz joined with three other senators to introduce legislation that would bar schools or local governments from using the credit swaps.

They stood in front of the incinerator.

Teplitz said it is still unclear if the bungling over the incinerator’s finances was the result of criminal conduct, poor legal advice or just bad policy decisions. But the lawmakers have proposed a series of reforms intended to prevent similar mistakes from happening again. Eliminating the use of interest rate swaps by schools and governments is one of their key reforms.

Teplitz said that these “risky and complicated” swaps have cost Pennsylvania taxpayers billions of dollars. From October 2003 to September 2012, 108 of the 500 school districts and 105 local governments had $17.25 billion in public debt tied to swaps, according to the Department of Community and Economic Development. There have been nearly 800 swap transactions.

The bill that would bar the use of interest swaps by most local governments and schools was sponsored by Sen. Mike Folmer, R-Lebanon.

Folmer said that business managers and other government officials believe they are financially savvy enough to complete the swaps without losing their shirts. But time and again, city and school officials have gotten burned. Mismanaged interest swaps contributed to the problems surrounding the Harrisburg incinerator, which now has $300 million in debt, lawmakers said.

Philadelphia could lose $186 million on an interest swap, but city officials are lobbying to keep the capability to use the transactions, The Bloomberg News reported. The auditor general’s office first raised the alarm about interest rate swaps by detailing how the practice cost Bethlehem School District more than $10 million.

The Pennsylvania Turnpike lost $109 million on an interest rate swap, Folmer said.

Folmer said that in conversations with financial analysts, he had been assured, that the only likely winner in an interest rate swap is Wall Street.

“It’s like a casino,” he said. “The house always wins.”

Folmer said that those in the private sector who want to engage in risky finances are free to do so. But public officials should not be allowed to gamble with tax dollars, he said.

Source: http://tribune-democrat.com/local/x2002146951/Bill-would-ban-interest-swaps

Rate Expectations - When will Interest Rates Start to Rise?

When we surveyed our clients three years ago, 98% believed interest rates would be higher today, yet the Bank of England base rate has remained at 0.5%. Similar opinion remains today - 89% of clients surveyed in March this year believe interest rates will be higher in three years' time. However, the market suggests savers could be disappointed once more.

Interest rate swaps are financial instruments which offer a guide to where the market thinks interest rates are heading. The swap market suggests inter-bank interest rates might fall further in the short term before an increase to around 0.75% in 3 years.

Predicted market interest rates

The chart shows a prediction of future interest rates calculated using the sterling interest rate swap curve.

Interest rate swaps are derivatives which allow institutional investors to 'swap' a floating interest rate for a fixed rate. They therefore provide an estimate of interest rates between now and their end date. Using two swap rates, for example the three-year and four-year swaps, it is possible to calculate the implied one-year interest rate between years three and four. The chart is based on these calculations.

For some time we have held the opinion that the UK's fragile economy will mean a prolonged period of low interest rates. Our view today is unchanged - we cannot see any meaningful increase in the base rate in the short or medium term.

More adventurous savers disappointed by the low returns on cash have turned to stock and bond markets. We have seen a growing number of people transferring Cash ISAs into the Vantage Stocks & Shares ISA in search of higher returns. This is a potential solution for those who can afford to take the risk, but it isn't for everyone.

Stock market investments can fall as well as rise, so your capital is not guaranteed, and once you have transferred to a Stocks & Shares ISA you cannot transfer back to a Cash ISA. It is also important to remember that interest in a Cash ISA is paid gross. Within a Stocks & Shares ISA, income is only paid gross on corporate and government bonds. On everything else, including cash, the income is paid net of basic rate tax but doesn't incur higher tax rates.

In the Vantage Stocks & Shares ISA you can choose from a huge range of funds and shares that could improve your returns.

In this environment it is also extremely important to ensure you are getting the maximum out of the capital you already have invested.

In Vantage you can keep costs low whilst ensuring you receive a premium service that helps you make better investment decisions. Our position as one of the largest brokers in the UK means we can help you keep costs low. We have negotiated savings of up to 5.5% when you buy funds and annual loyalty bonuses of up to 0.5% each year. You can also buy and sell shares and other listed investments from just £5.95 and never more than £11.95 per deal online. Over the last decade we have saved our clients over £1 billion in charges.

We also strive to keep you informed of the wider economic situation through the Investment Times, regular email updates and the wealth of information on our website. This should help you form your own views and help you identify investment opportunities.

If you hold investments with companies which don't provide you with any ongoing research and information, you could consider transferring them into our Vantage Service. Alternatively, if you hold poorly performing investments with other providers and you feel it's time for a change you could transfer to Vantage and choose new investments that you believe have more potential.

If you are happy to make your own investment decisions, transferring is much simpler than you might think.

Source: http://www.hl.co.uk/news/articles/rate-expectations

Protection wanted over Interest Rate Swaps

The Commerce Commission is seeking assurances from banks they will not victimise farmers who give evidence in its interest rate swaps investigation.


The commission has asked farmers to provide more detailed information in order to build a complete picture of the controversial sales to the rural sector.

But it is concerned people will not come forward for fear of repercussions to their businesses.

Farmers have expressed worries that providing information or giving evidence against banks in court might leave them in a vulnerable position.

The commission's notes for a meeting with MP Damien O'Connor say the investigation is being given high priority.

The notes reveal the commission has already written to banks advising them of its view that witnesses can provide information without fear of adverse consequences.

It has scheduled meetings with the banks to seek assurances they will abide by that view.

The commission launched its investigation last year after farmer complaints and media stories on the sale of the complex derivative financial instruments, but it now wants more farmers to come forward.

More than $4 billion of interest rate swap loans were sold to farmers between 2004 and 2009 as a protection against interest rates rising. However, when interest rates fell, they found themselves trapped into rising interest costs.

The sale of swaps appeared to mirror those made overseas to businesses in Britain and to local authorities in the United States and Italy - all countries where there has been a national outcry and investigations by regulators.

The commission has been in contact with the UK Financial Conduct Authority to discuss its investigation.

Many farmers claim to have suffered significant financial loss as a result of entering into the interest rate swaps. But many of the complainants claim to have done deals with the banks involved which require them to sign confidentiality agreements and not to talk to the media.

The commission's notes say it has a large team working on the investigation and as at May 7 it had been contacted by 98 people about rural swaps, either with complaints or through a questionnaire it invited people to fill out.

It has issued statutory notices to banks under the Fair Trading Act and received some information, although more was to come once banks had trawled their old IT systems.

The commission is in touch with the Financial Markets Authority and Federated Farmers about the investigation, it said.

Source: http://www.stuff.co.nz/business/farming/agribusiness/8658674/Protection-wanted-over-interest-rate-swaps

Interest Rate Swap Information

Interest rate swap (IRS) - a contractual agreement set up by two parties where the upcoming interest payments are exchanged for a specified fixed rate of interest.

It has come to light that this product has been mis-sold to organisations as part of business loans, with high street banks failing to inform businesses of the risks involved in consenting to the hedge agreement, leading to interest rate swap mis-selling.

Were you informed of the risks?

Interest rate swaps are sold to protect businesses against fluctuations in interest rates, saving them from high repayments so that they have an opportunity to manage their finances more effectively.

However, the product does come with a number of risks, and financial institutions are responsible for explaining these to the client prior to setting up a contractual agreement , making sure that they fully understand the hedging product and checking that it is completely suitable for the business. To comply with regulatory requirements, a bank must make customers aware of the potential IRS risks:

• Larger payments following interest rates falling
• Complex exit procedures
• Significant exit and cancellation fees

Following the substantial changes that have taken place in the financial climate, businesses are discovering that they are facing larger repayments and problematic early termination procedures after having interest rate swap deals pushed upon them, without being fully informed of the downfalls.

Helping businesses mis-sold IRS

Linder Myers has solicitors, partners and associates who have extensive knowledge on interest rate swaps and a thorough understanding of the contractual law breaches that can occur during the process.

We also support a wide range of businesses during the complex process of claiming for IRS mis-selling. Our team can provide you with a full understanding of your position and the possible claim you can bring against a bank, working hard to establish the strongest possible case.

Source: http://www.lindermyers.co.uk/interest-rate-swap-information

Small Talk: Small Firms Find Justice Hard to come by in Swaps Scandal

Banking analysts often draw parallels between the payment protection insurance mis-selling scandal and the continuing controversy over interest rate swap contracts wrongly sold to small and medium-sized enterprises. There are certainly similarities – not least in the avaricious behaviour of banks' sales staff who peddled both products – but a crucial difference in the regulatory response means many SMEs may find it much harder to get redress than PPI victims.

In the latter case, all the victims are consumers, and are entitled to the support of financial regulators as they seek justice. The picture for SMEs is less clear. Regulators – first the Financial Services Authority and now its successor, the Financial Conduct Authority – take the view that some SMEs are "sophisticated", and should not fall within the remit of the automatic review of interest rate swap mis-selling it has ordered.

The argument is that some businesses were mature enough to understand the risks they were taking in buying interest rate swaps – at the very least that they had the resources to take proper advice. And these contracts weren't necessarily inappropriate for many businesses, since they offered potentially valuable insurance against interest rate rises. The issue is whether businesses understood the downside risks of the cover.

The difficulty is it has not been possible to come up with a precise definition of sophisticated. Under the FCA's rules, businesses that bought interest rate swaps with a contract value of more than £10m generally do not qualify for the review, but there are other criteria to consider too. Some SMEs with a far from sophisticated understanding of financial services may miss out on the review while others, which did know what they were doing, qualify.

Those that miss out have little option but to begin legal proceedings if they wish to claim compensation. Developments in one such case underline just how fraught and time-consuming this process can be. Business partners Paul Rowley and John Green have been embroiled in a court battle with Royal Bank of Scotland for more than a year over the interest rate swaps it sold them. Their claim was rejected last December but an appeal will start at the end of July. The case is worth watching since the original verdict, based on the argument that the bank provided information rather than advice, was handed down before the FSA said it thought 90 per cent of interest rate swaps had been mis-sold.

Seeking redress for interest rate swap mis-selling will be far more straightforward for businesses that qualify for the regulatory review. Last month, the FCA gave many banks permission to begin approaching SME clients in order to begin that process. Those outside the review may have to wait much longer – and some victims of mis-selling will never bring a case.

Small businesses are getting better at using the services of regulators. Figures published today by the independent finance provider Syscap reveal that 612 SMEs took complaints about loans and overdrafts to the Financial Ombudsman in 2012, a 17 per cent increase on the 522 cases in 2011.

However, only businesses with an annual turnover of less than €2m (£1.7m) and fewer than 10 employees are entitled to use this scheme. Other SMEs must resort to legal action.

A line has to be drawn somewhere. When a company reaches a certain size, it must take greater responsibility for its decisions than would be expected of consumers and smaller businesses. Still, as we continue to work to encourage SMEs to grow and create jobs, there may be a case for shifting that line in favour of small businesses.

Eco City cabs driving into the black

Look out for annual results from the Alternative Investment Market-listed Eco City Vehicles, which supplies Mercedes black cabs to London's taxi drivers.

Due early this week, the 2012 figures will show a 33 per cent increase in sales, to more than £30m, thanks to the growing popularity of the company's Vito cab. The company is also back in profit, to the tune of £800,000, after a £1m loss last time out.

Eco City has benefited from new rules that impose a 15-year age limit on London cabs, but it was boosted by the travails of rival Manganese Bronze, which slipped into administration before being rescued. That helped Eco City to double its share of taxi sales to about 40 per cent.

One man who clearly believes it is going places is Nigel Wray, the serial entrepreneur, who owns just over 15 per cent. Watch out for an update on rumours that it plans new ventures.

Tech City 'is hampered by lack of skills and capital'

Is Tech City really the vibrant success story that many, including the Government, are so keen to celebrate?

As the Shoreditch Digital festival begins today, promoting the small part of east London that has become home to so many technology sector start-ups and SMEs, research suggests that businesses there are finding the going much tougher than one might imagine.

The festival, featuring events with speakers from "successful and innovative" Tech City companies, offers an opportunity to network and swap experience and advice. But the market research agency GfK, which has surveyed half the 1,350 businesses there, says many are having real difficulties. A lack of skilled workers is restricting growth at 77 per cent of these firms, GfK says, while 33 per cent warn a lack of access to capital is hindering their business.

Tech City businesses were also notably sniffy about the support they've had from policymakers. Though ministers, from David Cameron down, have made visits, GfK documented criticism of official initiatives that appeared to be more about PR. "Our research shows Tech City is at a tipping point," said Ryan Garner, GfK's research director.

Small Business Man of the Week: Greg Isbister, founder, Blis Media

I launched my business in 2004. In my final year at university I'd worked on a project to transmit media wirelessly; when the first Bluetooth phones came out, I understood the technology well.

"I started out with a £5,000 loan from the Prince's Trust. The one thing I was told was 'Don't give up the day job,' but I ignored that advice. Our business now is to act as a real-time seller of advertising. When someone opens a website, our technology looks at who and where they are, and the website they're opening; then, within 60 milliseconds, we auction the right to sell a personalised advert to that web browser. Our revenues come from commission on the sale. Business is growing very quickly – in the past three years, sales are up 78 per cent and we expect 2013 revenues of £5m.

"It's been hard work; when we started out, the service was based on text messages. We've now worked with more than 400 brands. The smartphone really transformed our business.

"The Prince's Trust was very patient, but we were finally able to pay it back. I've just moved to Singapore to build up our Asian business – it feels as though I'm in start-up mode all over again.

Source: http://www.independent.co.uk/news/business/sme/small-talk-small-firms-find-justice-hard-to-come-by-in-swaps-scandal-8623066.html

Swap Litigation could See Tide Turn on Banks

Things looked bleak for North West property firms affected by mis-sold interest rate swaps. But there is some light at the end of the tunnel, says Alison Loveday of law firm Berg.


It is just over a year since the rampant mis-selling of interest rate swaps by high street banks first made headlines. The Financial Conduct Authority, the successor to the Financial Service Authority, estimated that 40,000 UK businesses were affected by mis-sold swaps. Other estimates were as high as 100,000.

What we do know is that bank staff, under pressure from their bosses, pressured businesses into buying these products. Interest rate swaps are in a way very logical. They hedge against the risk of rising interest rates which, pre-2008, was a very real concern for companies. However, many of these swaps imposed massive charges if rates were lowered, which they were in early 2009, to just 0.5%. The problem is that, often, businesses weren't warned about this. An FSA investigation earlier this year found that 90% of interest rate swaps were mis-sold.

The impact of these mis-sold products was particularly acute in the property sector. As a firm we are currently handling more than 60 cases of mis-sold swaps against banks, of which about a third involve property companies. Opal Property Group, which collapsed earlier this year with debts of more than £900m, was just one of many North West businesses adversely affected by swaps.

It is not difficult to see how we got into this mess. In the years up to 2008, when the UK property market collapsed, real estate businesses generally enjoyed good relationships with their banks - perhaps not surprising given that property prices were rising and debt financing for projects was plentiful. In many cases, and this was confirmed by our clients, banks were originating deals for developers, identifying sites and then providing the debt to acquire them.

But when the market took a dive it left many property businesses with large debt piles and without the finance to develop their land.

Of course, against that pre-crash backdrop of 5% interest rates which could rise at any time, it is not difficult to see why so many property companies bought financial products which hedged against an increase. Many developers have debt-to-turnover ratios that would give the boss of, say, a manufacturing business, nightmares, so interest rate fluctuations affect them disproportionately compared to most firms.

The result was that many property companies were left unable to exit the interest rate swaps - many facing huge monthly payments - and they became 'zombies': struggling to service debt and without the cash to invest and grow. Some are kept alive by banks under political pressure to be seen to be supporting the economy. Others were forced into insolvency. Even if the business can service its debts, other breaches of covenant, such as the loan-to-value ratio, are relied upon by the bank to appoint administrators. One such company is Opal, being a property firm hampered by an interest-rate swap that was subsequently forced into administration.

The North West remains at the coalface of the damage wreaked by mis-sold interest-rate swaps and I have seen first-hand the distress and damage caused by mis-sold swaps. Meanwhile, with interest rates low and property prices stagnant, the market feels artificial, but is unlikely to change anytime soon.

However, we must sound a note of optimism. Even as businesses survive merely as zombies, many are fighting for compensation for the losses incurred by mis-sold swap products. Property companies are disputing the contracts and how they have been implemented. As firms claw back what they are owed, they will have more cash on their balance sheets to invest and grow, boosting the economy. The fight-back by businesses has begun.

Source: http://www.placenorthwest.co.uk/news/archive/13590-swap-litigation-could-see-tide-turn-on-banks.html