Fitch: ICAP's Libor Settlement Highlights IDB Compliance Risks

Wed Sep 25, 2013 12:20pm EDT

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(The following statement was released by the rating agency) LONDON, September 25 (Fitch) The GBP55m settlement reached by ICAP for broker misconduct relating to Libor highlights the heightened compliance and legal risks facing inter-dealer brokers (IDBs) from structural changes in the financial markets, Fitch Ratings says. We believe ample liquidity and contained leverage are important to offset the risk to financial profiles from potential penalties and costs arising from increased legal and regulatory scrutiny. IDBs are vulnerable to similar compliance risks as their global banking clients. Market infrastructure reforms, particularly on exchanges and other trading platforms, central clearing and central counterparties, are raising risk and earnings challenges for IDBs and global trading banks. We downgraded three IDBs - ICAP, Tullet and BCG - in June to reflect the persistently challenging operating and earnings environment. ICAP's leverage will increase only slightly following the settlement with the UK's Financial Conduct Authority and the US Commodity Futures Trading Commission. We expect its pro forma gross debt to adjusted EBITDA ratio to be around 1.8x, within the tolerance of its 'BBB' rating. EBITDA performance is likely to remain subdued in FY14 driven by muted market volatility, somewhat offset by accelerated cost-cutting efforts and relatively stable revenue in the post-trade and information businesses. However, tail risks remain, despite ICAP having strengthened its compliance and monitoring functions since 2010. A settlement with the US Department of Justice regarding Libor cannot be ruled out, even though ICAP and its subsidiaries have not yet been formally charged. ICAP is the only Fitch-rated IDB so far to be formally investigated in the Libor probe. Penalties and fines are event risks inherent to all IDBs. The sector is very litigious, which can result in higher legal costs and potential settlements. As with any event risk, material changes in a company's financial or business position that increase risk to bondholders would likely lead to negative rating actions. Additional liquidity buffers and a prudent approach to leverage can help offset legal and regulatory risks. A new GBP50m short-term facility gives ICAP additional flexibility to manage its liquidity, especially ahead of refinancing its EUR300m Eurobond that matures in mid-2014. We believe the risk of reputational damage from the settlement for ICAP is low, partly because the settlement relates to compliance failure within ICAP Europe's yen Libor operations and not to more widespread misconduct. ICAP was also not directly involved in setting the benchmark rate. Neither senior management, nor ICAP Europe itself, were implicated, however three former employees have been charged for assisting Libor manipulation by the US authorities. The burden of costs arising from the Libor scandal is likely to be shared across a broader group of banks as the investigations proceed. So far, UBS, Barclays and RBS have reached settlements with the authorities. Contact: Erwin Van Lumich Managing Director Financial Institutions +34 93 323 8403 Fitch Ratings Espana, S.A.U. Paseo de Gracia, 85, 7th Floor 08008 Barcelona Christopher Keeling Analyst Financial Institutions +44 20 3530 1494 Cynthia Chan Senior Director Fitch Wire +44 20 3530 1655 Media Relations: Hannah Huntly, London, Tel: +44 20 3530 1153, Email: hannah.huntly@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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