Class Action: Intercontinental Exchange, Banks Damaged Investors by Manipulating ICE LIBOR Benchmark

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A proposed class action lawsuit has been filed in New York against The Intercontinental Exchange, Inc. (ICE) and a group of major banks over their alleged manipulation of ICE LIBOR, the most widely used benchmark worldwide for floating-rate financial instruments, since February 1, 2014. By manipulating the benchmark, the defendant banks, the lawsuit claims, earned a profit by underpaying those who invested in financial instruments indexed to ICE LIBOR.

Described as a cornerstone of the modern financial industry, ICE LIBOR, the case explains, is used to determine the interest rates for “hundreds of trillions of dollars” in floating-rate financial instruments, such as floating-rate notes and interest rate swaps. Under ICE LIBOR, the suit states, floating-rate instrument investors receive payments dependent upon the benchmark rate.

According to the lawsuit, ICE LIBOR rates are administered by the Intercontinental Exchange, which owns and operates the New York Stock Exchange, and are set and published each business day based on daily submissions ICE receives from a panel of multinational banks that includes some of ICE’s co-defendants. Overlaying the ICE LIBOR rate-setting process is the following “submission question” posed to the panel banks each day, the answers to which the lawsuit states are used by ICE to define the benchmark:

“At what rate could you borrow funds, were you to do so by asking for and then accepting interbank offers in a reasonable market size just prior to 11am?”

In other words, the panel banks are asked each day to supply the rates at which they could borrow funds from each other, which are then used to determine the ICE LIBOR. The benchmark, according to the suit, is meant to “gauge[] the interest rate, credit premium and liquidity premium that a leading bank would expect to be offered by another similar institution.”

The problem, the case alleges, is that the daily submission question assumes there is an active “interbank” funding market in which banks routinely borrow money from each other. In reality, the lawsuit says, this market “has all but ended in recent years.”  The case explains that instead of engaging in interbank unsecured borrowing, banks have since at least 2008 leaned toward holding funds in reserve and earning interest on such funds. In fact, on many days, the suit says, there are no transactions at all on which banks can base their ICE LIBOR submissions, which apparently is no roadblock to setting ICE LIBOR rates.

“Nevertheless, even though the underlying interbank lending market virtually disintegrated, the Submission Question that serves to define LIBOR has remained,” the complaint states. For its part, ICE has continued to ask the submission question every day since February 2014, the lawsuit alleges, and the banks have continued to answer despite knowing the underlying market on which the question relies “no longer exists.”

The absence of an interbank funding market has left ICE LIBOR susceptible to manipulation, the case asserts, as the rates are no longer transaction-based and are instead determined by the defendants’ “expert judgment.”

“The inescapable conclusion,” the complaint reads, “particularly since there was not an active underlying interbank market on which to base their submissions and rates, is that Defendants manufactured them.”

According to the lawsuit, the defendants colluded to set ICE LIBOR consistently low throughout the class period and have thereby damaged investors who received payments from financial instruments indexed to ICE LIBOR. The case claims ICE, the panel banks, and their yet unnamed agents, affiliates, and co-conspirators have violated federal and state antitrust laws.