Lloyds: The Borrowing Rate That Hid the Borrower’s Trouble

Lloyds HBOS LIBOR manipulation led to a $105 million CFTC settlement over allegations that submitters moved rates to favor trading positions and concealed HBOS’s funding stress. We see the absurdity in the Commission’s account: a rate meant to show what a bank would pay to borrow became a number shaped by what it wanted to earn or wanted others to believe. For someone inside treasury, the submission file, the trading book and the instructions behind both tell different parts of that story.

The Commodity Futures Trading Commission announced the settlement on July 28, 2014, against Lloyds Banking Group plc and Lloyds Bank plc, formerly Lloyds TSB Bank plc. Its Division of Enforcement investigated conduct spanning mid-2006 through 2009 involving Sterling, U.S. Dollar and Yen LIBOR. The order required a civil monetary penalty and changes to the banks’ submission controls.

How LIBOR Submissions Reached Other People’s Contracts

LIBOR submissions were supposed to reflect the rate at which a bank could borrow unsecured funds in the London interbank market. During the period covered by the case, panel banks sent their estimates shortly before 11 a.m. London time. The calculation discarded the highest and lowest quarters of submissions and averaged the rest for each currency and maturity, or tenor.

The CFTC’s Lloyds order explains why the input mattered: LIBOR helped price loans, over-the-counter swaps, and exchange-traded interest rate futures and options. Both the resulting fixing and each bank’s individual submissions became public. A submission could therefore affect other people’s contracts while telling the market something about the submitting bank’s ability to borrow.

According to the order, London money-market traders at Lloyds TSB and HBOS made the submissions. Their treasury desks raised wholesale funds through interbank deposits and loans, certificates of deposit and commercial paper, and used derivatives primarily to hedge risk. The Commission alleged that inadequate supervision and the absence of specific submission controls allowed the desks’ trading interests to enter the rates they reported.

This is a form of market manipulation that begins with the number a business contributes to a benchmark. The World Federation of Exchanges’ 2024 working paper, An Analysis of Market Manipulation Definitions Around the World, classifies benchmark rigging as manipulation through false or misleading submissions. It also explains why submitters may coordinate when an individual contribution has little influence on the final benchmark.

When the Trading Book Chose the Rate

The Sterling allegations concerned submissions adjusted to favor cash and derivatives positions from at least 2007 through 2009. According to the Commodity Futures Trading Commission, the Lloyds TSB submitter held positions whose payments frequently reset or settled at month-end or on quarterly settlement dates. He knew which direction in LIBOR would benefit those positions and allegedly moved his submissions accordingly.

The order’s conversations show how specific a request could be. On March 31, 2009, the former HBOS Sterling submitter wanted a higher three-month rate because he was receiving payments tied to it. The following day, he wanted a low one-month rate for a liability and a high three-month rate for an asset. His response to a junior Lloyds TSB trader made the liability request explicit:

The Commission said the junior trader passed those requests to the Lloyds TSB submitter. We see the conflict in that pairing: low where the book had to pay, high where it would receive. The requested rate followed the position’s maturity and payment direction.

The allegations also reached actual bids in the cash market. In 2006, according to the order, Lloyds TSB submitters increased bids for one-month Sterling cash, seeking to make other panel banks submit higher rates and improve the return on Lloyds TSB’s forward rate agreements. The Commission described an HBOS submitter using a similar strategy for three-month Sterling. For an insider, the connection is between the cash bid and the separate position that would benefit from a higher fixing.

When HBOS Wanted Funding Stress Out of View

The alleged HBOS funding-stress suppression had a different purpose: preserving its ability to raise money. The Commission alleged that managers wanted Sterling and U.S. Dollar submissions kept close to other banks’ rates so HBOS would not look like a desperate borrower. The bank’s own published submission could reveal the trouble management wanted lenders to overlook.

The order describes serious funding and liquidity problems during 2008. As those problems worsened in September, HBOS’s U.S. Dollar submitter raised his submissions to approximate what the bank would have to pay for funds. His three-month submission became the highest on the panel. After discussions with senior managers, his supervisor directed him to bring the rate closer to the others.

According to the order, the submitter cut that submission by 55 basis points on September 26, 2008. In one day. It reproduces what he told an employee at another financial institution that day:

Sterling followed the same alleged pattern. In October, the supervisor directed submitters toward the expected published LIBOR because an outlying rate could trouble buyers of HBOS’s paper. His own supervisor agreed. The order explains the commercial concern: those buyers might refuse to lend or demand higher rates if HBOS reported what it believed borrowing would actually cost.

The October 30 instruction, as the Commission described it, made the substitution explicit. According to the order, submitters were told to use rates at or slightly above what HBOS was willing to pay for deposits or certificates of deposit, instead of the rates at which funds were offered to it. The directives remained in place through the acquisition. We see a bank allegedly trying to make its funding problem less visible by changing the figure that exposed it.

The Barclays LIBOR allegations also included management pressure to conceal funding stress. The HBOS account makes the funding distinction especially concrete: what the bank wanted to pay and what another institution would accept could be different rates. Treasury employees who knew both could see what the submitted figure left out.

After the Acquisition, the Offices Still Talked

Lloyds TSB Group acquired HBOS on January 19, 2009, creating Lloyds Banking Group. The banks continued separate LIBOR submissions until HBOS left the panels on February 6. Lloyds TSB then continued submitting on the group’s behalf.

The Commodity Futures Trading Commission alleged that cooperation between the trading books continued after that change. In its account, the Sterling submitters remained in separate offices until the summer and discussed their positions by telephone, with the former HBOS submitter requesting favorable rates from the person still making the submission. Lloyds TSB’s submitter allegedly accommodated those requests unless his own positions favored a different rate.

The order describes the same alleged arrangement in U.S. Dollar communications. According to the Commission, in May the former HBOS submitter told a trader assisting the Lloyds TSB submitter that they should coordinate inputs around large resets, pointing to a liability whose payment depended on three-month LIBOR. The order quotes the response to a later request for a lower three-month submission:

Coordination also crossed company boundaries. From at least mid-2006 to October 2008, the Commission alleged, Lloyds TSB’s Yen submitter exchanged requests with a Rabobank submitter to favor their banks’ trading positions. The Lloyds TSB submitter frequently agreed to help unless the requested direction conflicted with his own book. In the Commission’s account, cooperation lasted as long as the positions suited it. The trading book still came first.

What Evidence Is Required to Prove Fraud?

For the Lloyds allegations, the evidence connects a submitted rate with the available funding information, the position that benefited and the communication explaining why the rate moved. A treasury employee may understand the market offers behind a submission. A derivatives controller may understand the reset exposure. Someone in surveillance or compliance may know what an alert or review found when those accounts did not match.

The order required the factors behind each submission, broker information and the bids and offers relied upon to be written down. Those explanations reveal how a rate was chosen.

The order separately required trading records, daily position and risk reports, and recorded communications about submissions and benchmark-linked trades. It required controls against improper requests and physical separation between submitters and traders primarily dealing in derivatives tied to the benchmarks. In this case, separate offices had still allowed alleged coordination by phone. The substance of the conversation mattered as much as where the desks sat.

What a CFTC Whistleblower Reward Pays

The CFTC whistleblower reward program can pay qualifying whistleblowers a combined 10% to 30% of the sanctions collected in an action. A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers. These are separate programs, and Lloyds’s benchmark settlement was a CFTC enforcement action.

You Know Why the Rate Moved

If you know the funding offers, the reset exposure or the instruction that changed a submission, speak with our whistleblower experts. We stay beside you from the first call, build your strongest CFTC whistleblower case and bring in benchmark-manipulation whistleblower lawyers who understand how treasury decisions reach the trading book.