Jan 26 Swaps broker ICAP will give up its role in establishing a widely used benchmark for derivatives, two sources familiar with the situation said on Sunday, after U.S. and UK regulators started probing the process.
The International Swaps and Derivatives Association (ISDA) will announce the change as early as Monday, one of the sources said, another blow for the UK broker after its involvement in the Libor rate-rigging scandal.
The organization's ISDAfix benchmark is an important reference point underlying contracts in the $630 trillion derivatives market, and ICAP collects data for the U.S. dollar-denominated part of it.
But in April last year, ISDA said it had been subpoenaed by the U.S, derivatives regulator - the Commodity Futures Trading Commission (CFTC) - over the benchmark, and ICAP has also said it is involved in that probe. Britain's Financial Conduct Authority is also investigating the benchmark.
The scandal surrounding Libor, which measures rates at which banks lend to each other, has shown how easy it is to manipulate such survey-based benchmarks, and how widespread the practice is. Banks such as UBS, Barclays and RBS have paid billions in fines over Libor.
Just last week, Reuters reported that global regulators now also have started looking at reforming benchmarks used in the largely unregulated currency market.
The ISDAfix rates are based on a survey of a panel of banks for a range of different currencies. Until now, ICAP collected banks' contributions for the U.S. dollar rate, and sent them on to Thomson Reuters Corp, which calculates the fixing.
ICAP has been doing this for more than 15 years, but the process will now change, and Thomson Reuters would start collecting data for the U.S. dollar rates just as it does for the other currencies, the first source said.
"We appreciate ISDA's interest in having a consistent polling process across each of the relevant currencies and fixings," ICAP said in a statement.
The firm had been providing "snapshots" using transaction-based information from its BrokerTec platform in addition to information from recent deals, the second source said, but the process would now return purely to a poll of participating banks.
There was a risk this could lead to inconsistencies, due to the way the dollar-denominated swaps market worked, the person said.
ICAP was fined $87 million by British and U.S. authorities in September over the role of its brokers in Libor-rigging. Criminal charges were also filed against three of its former employees.