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Swap traders’ morning fix under scrutiny

"For two decades, one electronic page on trading terminals has dominated the shadowy world of interest rate swap trading between banks and their clients.

"Known as 19901, its legacy page number from the defunct Telerate era, it retains a crucial role in the $164tn US swap dollar market, which is now attracting regulatory scrutiny.

"Every day before 11am in New York, 16 banks provide the rates at which they would buy and sell a benchmark swap. The rates are collated to provide the ISDAfix, named for the International Swaps and Derivatives Association.

"For the past decade, ICAP, the largest interdealer broker, has published the page, using the prices supplied by banks that transact swaps. That means traders are keen to do business with ICAP because they want the screen to reflect their trades.

"So lucrative is the business for ICAP that its brokers call its rate-swaps desk in Jersey City by a more catchy sobriquet: “Treasure Island.”

"Even as the CFTC was sending subpoenas to market participants last November, the trade association wrote to the European Commission to argue for the benefits of its benchmark. “Without such a benchmark, it might be necessary to go through the process of calling a number of active dealers for quotes in order to settle transactions,” ISDA wrote.

"After it hired Oliver Wyman to review the process on Tuesday, Steven Kennedy, head of strategy and communications at ISDA, said: “We understand that best practices have emerged via the Wheatley Report and we want to make sure that the ISDAfix is in accord with those practices.”

"The Wheatley Report was produced last year by Martin Wheatley, now chief executive of the new Market Conduct Authority in the UK. His was the main UK government-ordered report into lessons learnt from the Libor scandal. But it also identified explicitly ISDAfix as an area of concern.

"Dennis Kelleher, president at Better Markets, says the Libor-rigging scandal shows that banks are willing to manipulate benchmark interest rates given the billions of dollars at stake. “It is laughable how – in the computer-driven 21st century – that the securities industry is still using old technology,” he says."

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