Societe Generale: The Gap Between Funding Costs and LIBOR

The Commodity Futures Trading Commission imposed a $475 million civil penalty in the Societe Generale LIBOR suppressed submissions case, which also covered attempts to move benchmark rates for trading profit. The agency’s allegations connect the rates the bank submitted with the higher borrowing costs Treasury knew it was paying, the warnings managers sent upstairs and the instructions that kept the submissions low. A Treasury employee who knows both numbers can see a problem the published benchmark conceals.

The French bank settled the CFTC enforcement action on June 4, 2018. The Commission’s allegations covered false reporting and attempted manipulation involving U.S. dollar, yen and euro LIBOR and Euribor, including successful manipulation of yen LIBOR on some occasions. Its account ran from 2006 through mid-2012, with two motives: improving trading results and, later, concealing funding stress.

A Borrowing Rate With Other People’s Money Attached

During the period covered by the case, a LIBOR submission was supposed to represent the rate at which the submitting bank could borrow unsecured funds in the relevant interbank market. Under the process described in the CFTC order, banks submitted rates each business day, the highest and lowest groups were removed, and the remaining submissions were averaged into the published fixing. Both the fixing and individual banks’ submissions were public.

That last detail mattered. A high submission told the market something about a bank’s funding position even before anyone considered its effect on a contract. Euribor used a related but different question: the rate at which one prime bank offered euro deposits to another, rather than the submitting bank’s own borrowing rate.

The order put the notional value of products indexed to LIBOR at approximately $350 trillion. Loans, swaps and exchange-traded interest rate contracts depended on it, including Chicago Mercantile Exchange Eurodollar futures. This is why benchmark manipulation reaches beyond the desk supplying a number: that number helps set payments owed by other people.

First, Rates to Suit the Trading Book

The Commission alleged that Societe Generale’s Paris Treasury desk used dollar LIBOR submissions to benefit its positions from February 2009 through May 2010. The submitter examined reset dates, when transactions would be repriced against the benchmark, and adjusted submissions toward the fixing that would help the desk. A favorable move could increase money received from counterparties or reduce money paid to them.

The alleged strategy accounted for the way LIBOR discarded extreme submissions. The desk aimed for the highest rate that would still be included in the calculation. From mid-September 2009 to mid-March 2010, 88% of the bank’s one-month dollar submissions ranked among the three highest submissions included in the final fixing. High enough to pull, low enough to count.

The order also describes requests crossing bank boundaries. From May 2006 to at least March 2007, Societe Generale euro derivatives traders allegedly exchanged Euribor requests with Barclays traders and relayed them to their own submitters, who sometimes accommodated them when positions lined up.

For yen LIBOR, the Commission alleged that derivatives traders in Tokyo sent requests to the bank’s London submitters to benefit their positions. The head of Treasury for Europe and Asia ordered the submitter to accommodate those requests, according to the order. The agency said the attempts sometimes succeeded during the July 2006 through August 2007 period.

Then, Suppressed Submissions to Hide Funding Stress

The Societe Generale LIBOR suppressed submissions allegations describe a change in motive during the Greek sovereign debt crisis. In spring 2010, the bank depended heavily on short-term dollar funding and had no retail U.S. dollar operation. According to the order, an analyst asked whether its comparatively high submissions meant it was having difficulty raising money.

The Commission alleged that certain executives reacted to the unwanted attention, and the global head of Treasury instructed staff to lower submissions. In that account, the problem Treasury had been asked to solve was how the bank looked. Its borrowing costs remained the inconvenient part.

According to the order, a June 2010 internal email made the gap explicit. The global head of Treasury told senior executives that the three-month submission was at least 10 basis points below what the bank really paid. The email proposed moving gradually toward real funding costs, while offering to return to the old method if market feedback became too negative.

The same conflict resurfaced when management faced a request for assurances about the submission process. In a recorded February 2011 call reproduced in the order, the global head of Treasury said:

The Commission’s account includes a period of improvement: from March to June 2011, submissions mostly reflected actual funding costs. In July, the order says, concern about the bank’s position relative to other panel members brought the suppression back.

False Funding Data to Explain False Submissions

When the British Bankers’ Association asked for funding data in early 2011, the Commission alleged that Treasury prepared a misleading chart to justify its submissions. The head of Paris Treasury first directed the submitter to include funding sources outside the LIBOR definition and select a period when the numbers looked closer together. Even that left too large a gap.

The order alleged that the manager then instructed the submitter to shrink the spread further. The submitter chose acceptable-looking spreads, fabricated lower funding rates and inserted them into a dummy chart. The head of London Treasury instructed a subordinate to provide the chart to the administrator. We see an especially revealing reversal here: the explanation was being made to fit the submission.

The order describes another alleged disguise later that year. According to the Commission, Treasury sent false funding bids into the market while telling prospective lenders individually that the bank would pay higher rates. A submitter also suggested discussing a deal face-to-face instead of putting its LIBOR reference in writing. For someone inside funding operations, the difference between the advertised bid and the rate accepted on the actual deal is a concrete part of this story.

The CFTC Was Asking While the Gap Remained

The Commission’s Division of Enforcement requested documents and information in July and September 2011. The order says executive management and senior Treasury managers knew about the investigation, yet dollar submissions continued below the bank’s borrowing costs. The agency alleged continuing decisions about the rate while investigators were asking about the process.

On September 9, 2011, the global head of Treasury described the situation to the investment banking head in an email reproduced in the order. The order describes a striking gap between the bank’s public presentation and its internal account:

Treasury’s Conflict Was Built Into the Desk

Paris Treasury handled dollar and euro LIBOR and Euribor submissions, while London Treasury handled yen LIBOR. The same Treasury desks borrowed and lent money, traded derivatives and operated as profit centers. The Commission said profitability influenced employees’ bonuses, and traders whose positions depended on the benchmarks also calculated submissions.

That structure put a funding judgment beside a trading incentive. The order alleged missing submission policies, training, communications restrictions and monitoring, alongside managers who sometimes encouraged or required improper inputs. The employees closest to the funding evidence were working inside the same structure that rewarded a favorable number.

The civil settlement required separation of submitters from relevant derivatives traders, records supporting submissions and recorded submission-related communications. These controls connect the rate to its supporting evidence and to the people who chose it.

What Evidence Is Required to Prove Fraud?

For a concern like the one in this case, we examine the submission alongside actual funding transactions, the instructions behind it and the economic reason for changing it. The order makes that comparison tangible: reset dates and positions explain the earlier profit motive, while funding deals, analyst inquiries and management emails explain the later pressure to suppress rates. A Treasury or benchmark oversight employee may know how those records connect.

The 2024 working paper An Analysis of Market Manipulation Definitions Around the World, prepared for a World Federation of Exchanges research project, describes how manipulation can involve different desks and instruments, with profits taken elsewhere. In the Commission’s account here, Treasury supplied the rate while a derivatives position could benefit. The funding transaction, submitted rate and internal instruction belong in the same account.

The bank’s alleged effort to avoid written LIBOR references also shows why trading communications and records matter alongside the final number. If you recognize that separation between what a desk knows and what it reports, we can work through the evidence and the CFTC reporting questions with you.

Whistleblower Rewards Follow the Right Program

The CFTC whistleblower program provides an aggregate award of 10 to 30 percent of collected monetary sanctions for qualifying whistleblowers in an action. Separately, a whistleblower case under the False Claims Act can pay 15 to 30 percent of what the government recovers. We help you connect the conduct you know to the program that fits it and bring in whistleblower lawyers with the relevant market experience.

You Know What the Desk Really Paid

If you saw funding costs rise while benchmark submissions stayed low, talk with our whistleblower experts about the decisions behind those numbers. We work beside you to develop the case from your knowledge of the desk, bring in CFTC whistleblower lawyers who understand benchmark submissions and Treasury operations, and stay with you as the matter moves forward.