No formal governance of Libor setting at Citi, court hears

London jury in Libor-rigging case hears from Citi Libor submitter about informal approach to benchmark setting

Libor setting was a 'subjective decision', court hears

Before 2010 Citi had no in-house written rules regarding the intricacies of submitting the London interbank offered rate (Libor), besides the published guidance from the BBA, the industry body responsible for administering the benchmark, Southwark Crown Court heard today (June 26).

Instead, training took place on-the-job under the wing of a senior manager, Laurence Porter, trader at Citigroup and former Libor submitter, told the jury of the Tom Hayes trial today. "The senior gives them more room as they get more familiar with the job," he explained.

He said that Libor submitters were often chosen because of their proven knowledge and ability to collect information on the particular currency they were put in charge of. Prior to 2010, when an internal Citi memo was sent around explaining the dos and don'ts of the submitting process, Porter said the bank relied on the guidance from the BBA. "Everyone would have been shown the BBA documents," he said.

Rather than being formally tested on their knowledge, prospective submitters "had to demonstrate that they understood the terms" to their senior before being able to establish themselves in the role.

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Porter, who was the primary yen submitter at Citi between 2007 and the start of 2008 before moving to Swiss franc, was speaking as a witness at the trial of Tom Hayes, a former trader and rate-setter at UBS and Citi, who is facing eight charges of conspiracy to defraud. The prosecution is arguing that Hayes rigged the Japanese yen Libor for the benefit of his trading position between 2006 and 2010, by enlisting brokers and traders to influence submitters at panel banks. He has pleaded not guilty.

The court has been shown transcribed conversations between Hayes and his brokers in which they discuss adapting the suggested Libors in the brokers' "run-throughs" to suit Hayes's trading book. Run-throughs are provided to submitter banks on a daily basis, and are supposed to be based on knowledge gleaned from market participation.

Porter explained today that, especially during the credit crisis in 2007–09, rate-setters were highly reliant on run-through prices in the absence of direct price information from their own bank: "There were times when it was the only information we had," he said.

The primary submitter looked at cash deals in the market first and foremost, but to form a decision the submitter could also look at information from factors related to credit ratings, derivatives or futures activity, news headlines, or macroeconomic events such as a central bank cutting interest rates, Porter said.

As the submission process needs to be an independent process, "market colour", as it is known, needs to be in very general terms, he continued.

In response to the prosecution asking if traders knew they couldn't approach submitters and talk about their trading positions in relation to Libor, Porter said: "I thought it was fairly well-known that that wasn't acceptable." He also said brokers should not name banks when talking about lending in the market, "but they could say 'a bank that was paying 45 yesterday is paying 48 today'."

He stressed that setting Libors was always a subjective decision, and not an exact science. "People reading the same information could come up with a different number." But they had to be able to justify the decision they'd made when estimating their bank's borrowing rate.

The trial continues.