LONDON (Reuters) - A Barclays executive said he ordered staff to manipulate interest rates in line with instructions from his then boss, Bob Diamond, following a conversation the British bank's former chief executive had with the Bank of England.
Jerry del Missier, who quit as chief operating officer two weeks ago, came under intense cross-examination on Monday from a parliamentary committee over whether he knew artificially lowering Barclays' rates was illegal.
Barclays was fined a record $450 million last month by U.S. and British authorities for manipulating the London Interbank Offered Rate, or Libor, the interest rate that underpins financial transactions worth trillions of dollars worldwide, between 2005 and 2009.
Barclays had said earlier that del Missier had given the order to understate the submissions Barclays made towards calculating the daily rate as a result of a misunderstanding.
The deputy governor of the Bank of England, Paul Tucker, in testimony to the committee last week, said he had been concerned that Barclays was submitting rates that were high, but he had not intended that as an instruction to submit artificially low rates.
In his testimony, del Missier said he had acted on instructions from his boss and he did not see anything wrong with what he was doing.
"I passed the instruction on to the head of the money market desk. I relayed the content of the conversation I had with Mr Diamond and fully expected the Bank of England views would be fully incorporated in the Libor submission. I expected that they would take those views into account," del Missier said.
"At the time it did not seem an inappropriate action given that this was coming from the Bank of England," he told the House of Commons Treasury Select Committee .
The London interbank offered rate (Libor) which is compiled from estimates by big banks of how much they believe they have to pay to borrow from each other is used for $550 trillion of interest rate derivatives contracts and influences rates on mortgages, student loans and credit cards.
An understated estimate could allow a bank to present a better picture of its financial health.
Del Missier, who had not previously commented on his role in the rate manipulation scandal, said his order to the head of Barclays' money markets desk in October 2008 followed a conversation with Diamond.
Diamond had told him that the Bank of England and the British government were concerned about the relatively higher rates that Barclays was submitting and wanted the bank to reduce the rate it was submitting as part of the Libor gathering process, del Missier said.
Del Missier's evidence had been expected to shed light on the chain of command at Barclays after Diamond's testimony nearly two weeks ago which some committee members have characterised as misleading, a charge Diamond has rejected.
Adair Turner, chairman of the Financial Services Authority (FSA), is due to follow del Missier before the committee and to face questions on the regulator's involvement and whether it was tough enough when the rate rigging occurred.
Questions have arisen over whether supervision of the benchmark rate was too lax. The Bank of England confirmed on Friday it had received U.S. recommendations to overhaul Libor, and had passed them on to the banking trade group responsible for the rate.
It also emerged that Barclays alerted U.S. regulators as far back as 2007 to concerns that banks were rigging benchmark interest rates, and policymakers on both sides of the Atlantic did not appear to take decisive action.
The British parliamentary committee has questioned Diamond, Barclays' Chairman Marcus Agius and Paul Tucker, deputy governor of the Bank of England, in its efforts to uncover what happened at Barclays.
Diamond and del Missier quit on July 3 and Agius said, during testimony to the committee last Tuesday, that BoE Governor Mervyn King effectively forced Diamond to go because he had lost the confidence of regulators.
Turner, one of the favourites to take over from King as BoE governor next year, is likely to be asked how involved he was in forcing Diamond out.
He could also be challenged on why the FSA didn't react more to warnings about Libor, and what was clearly a strained relationship with Barclays.
The FSA chief sent a scathing letter to Barclays in April telling the bank that its "aggressive" culture needed to improve.
Barclays is the only bank so far to admit to giving false information as part of the process of setting Libor.
The conversation in October 2008 between Diamond and Tucker is central to the question whether Barclays was told by the central bank it could submit lower Libor rates.
In an internal memo written after that conversation, Diamond said Tucker told him "it did not always need to be the case that we appeared as high as we have recently".
Diamond has since said he did not take that as an instruction to submit lower rates, but said del Missier mistakenly understood the memo as a green light to do so.
When Tucker appeared before the committee he said the memo misrepresented the conversation. The purpose of the call was to share his concerns about Barclays' funding costs rather than discuss interest rates, Tucker said.
More than a dozen banks are expected to be drawn into the Libor scandal, which is being probed by authorities in North America, Europe and Japan.
Libor rates submitted by banks are compiled by Thomson Reuters (TRI.TO), parent company of Reuters, on behalf of the British Bankers' Association.
Additional reporting by Chris Vellacott, Douwe Miedema, Kate Holton, Kylie MacLellan, Huw Jones and Venetia Rainey; writing by Alexander Smith; Editing by Giles Elgood