ICAP’s Libor woe comes at awkward time for broking

Thu Jan 24, 2013 6:10pm IST

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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)

By George Hay

LONDON, Jan 24 (Reuters Breakingviews) - ICAP’s Libor woe comes at an awkward time for the broking industry. The London-based inter-dealer broker is being investigated by the Financial Services Authority for possible breaches related to the fixing of interbank interest rates. Amid trading conditions described in September by ICAP Chief Executive Michael Spencer as the toughest in his 36-year City career, it adds a decidedly unhelpful layer of uncertainty to an already troubling picture.

The notoriety and scope of the Libor hydra means any firm embroiled risks a reputational hit, or worse. ICAP has at least one advantage: its brokers do not and did not submit the borrowing rates used to set Libor. But when UBS’s (UBSN.VX) involvement in the scandal was laid bare in December, it was made clear that brokers at unnamed firms had been paid by bankers to make fake bids, and offers, that may have obscured Libor fixing.

As yet, the FSA has stopped short of suggesting ICAP was involved. And even if the broker is definitely implicated, the second-order nature of the alleged offence makes a large fine less likely. If penalties such as UBS’s $1.5 billion or Barclays’ (BARC.L) 290 million pounds don’t materialise, it will be just as well. As intermediaries, brokers lack fat equity reserves to absorb losses. As of last September, ICAP’s equity reserve was 1.1 billion pounds, just 1.6 percent of its liabilities.

With or without a Libor fine, ICAP has two other problems. One is that its investment banking clients are in full deleveraging mode, and are doing less business. The other is that closer regulation of derivatives trades is moving more market-making onto computerised exchanges. That means less scope for traditional over-the-phone “voice-broking”.

ICAP has taken steps to protect itself. Two-thirds of operating profit now comes from electronic, post-trade and information businesses, a high proportion compared to its competitors. Even if the UK regulatory probe gets nastier, the wider business may not be too badly affected. ICAP can hardly rest easy, however - the worst of the pain suffered by UBS and Barclays was reputational. That looks like the biggest risk now facing ICAP.

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CONTEXT NEWS

- The UK's Financial Services Authority is probing possible breaches of market conduct rules by inter-dealer broker ICAP. The inquiry is in connection with the Libor interest rate-rigging scandal, according to a source familiar with the situation. The FSA's investigation began in March last year.

- Two brokers at inter-dealer broker RP Martin were among three men arrested in connection with Libor on Dec. 11, Reuters reported.

- ICAP suspended one employee and put three others on administrative leave in connection with the Libor probe, Reuters reported on Dec. 19.

At 1000 GMT on Jan. 24, ICAP shares were trading at 310 pence, down 4.9 percent.

- ICAP statement [ID:nRSX3043Wa]

- Reuters: Broker ICAP in FSA Libor-fixing investigation - FT [ID:nL6N0AT010] - For previous columns by the author, Reuters customers can click on [HAY/]

(Editing by Robert Cole and David Evans)

((george.hay@thomsonreuters.com))

((Reuters messaging: george.hay.thomsonreuters.com@reuters.net)) Keywords: BREAKINGVIEWS ICAP/

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