Hong Kong's central bank extended its investigation of possible misconduct in setting the city's benchmark interest rates to HSBC Holdings Plc (HSBA) and other lenders after crackdowns by the U.S., U.K., Japan and Singapore.
The Hong Kong Monetary Authority's probe, which started with UBS AG (UBSN) in December and has since been widened to "a number" of banks, is continuing, the central bank said in an e-mailed statement yesterday. HKMA said it asked London-based HSBC, whose shares are listed in Hong Kong, to "promptly implement" remedial measures required by Singapore's central bank last week following a similar probe in the city-state.
The review of banks setting the Hong Kong Interbank Offered Rate (HIHD03M) and other benchmarks comes amid increased global scrutiny of data submitted for key rates. Singapore last week censured 20 banks for trying to rig its rates and ordered them to set aside as much as S$12 billion ($9.5 billion) pending improvements in their controls. The U.K.'s regulator began looking into the currency market after Bloomberg News reported that traders had manipulated rates.
"HSBC is the largest bank in Hong Kong and the largest participant in the interbank activity, that's why HKMA names HSBC, but that doesn't mean it has a lot of problems," said Steven Chan, a Hong Kong-based analyst at Citic Securities International Co. "HKMA perceives themselves as the most prudent supervisor in the world, so they have to do something."
'Millions of Messages'
The HKMA's investigation has included "millions of communication messages records" so far, according to the statement, which signaled that the probe may take a year because of the number of documents being reviewed. The regulator said in December it will also consider whether any potential misconduct may have had a material impact on the rate.
About HK$1.9 billion ($245 million) of new mortgage loans approved in April were pegged to Hibor, as the Hong Kong interbank offered rate is known, or 11.8 percent of the total, according to data posted on the HKMA website. A year earlier, HK$1.2 billion, or 4.9 percent of new home loans, were tied to Hibor, the data show.
Adam Harper, a spokesman for HSBC in Hong Kong, declined to comment on the HKMA statement. Europe's largest bank, which was founded in Hong Kong and Shanghai in 1865, was required by British regulators to move its headquarters to London from Hong Kong in 1992 following its Midland Bank Plc purchase as part of a push westward.
Shares of HSBC rose 2.1 percent in London trading yesterday. The stock fell 0.7 percent to HK$83.50 in Hong Kong as of 11:01 a.m. local time, paring its gains over the past year to 25 percent.
The regulator said it began its probe into Zurich-based UBS after overseas regulators alerted the HKMA about potential rate manipulation. Preliminary information provided by one foreign regulator indicated that employees were responsible for the potential misconduct, rather than the bank's systems, HKMA Deputy Chief Executive Arthur Yuen said in December.
Hibor is based on an average of 14 quotes submitted by 20 banks including BOC Hong Kong Holdings Ltd. (2388), HSBC and Standard Chartered Plc, according to the Hong Kong Association of Banks' website. The three highest and three lowest submissions are excluded from the average.
In February, Hong Kong's central bank moved administration of interbank lending rates in the city to the Treasury Markets Association from the banks' lobbying group. Other measures included a decision to review the list of reference banks that submit Hibor rates every year, instead of every two years.
The Hong Kong Association of Banks decided to end the publication of Hibor for tenors that have less demand, such as four- and five-month periods, it said in a June 7 statement.
The latest probe may add pressure on HSBC Chief Executive Officer Stuart Gulliver, who is trying to reduce costs and expand in faster-growing markets while boosting internal controls to curtail attempts to rig rates and launder money. In Hong Kong, HSBC's biggest single Asian market, profit rose 30 percent to $7.58 billion last year.
HSBC said in March it's "unable to reliably measure" costs related to probes of the London interbank offered rate.
Singapore's monetary authority on June 14 said a yearlong review revealed that 133 traders at 20 banks led by ING Groep NV, Royal Bank of Scotland Group Plc (RBS) and UBS, tried to manipulate the Singapore interbank offered rate, swap offered rates and currency benchmarks from 2007 to 2011. The regulator will make rigging key rates a criminal offense and bring supervision under its oversight.
Barclays Plc, UBS and RBS have been fined about $2.5 billion in the past year for distorting the London interbank offered rate, which is tied to $300 trillion worth of securities. Regulators are also probing ISDAfix, a measure used in the $370 trillion interest-rate swaps market, as well as how some oil product prices are set.
The International Organization of Securities Commissions, or Iosco, a Madrid-based group that harmonizes market rules, identified a set of benchmarks in a January report that could impair the global economy if they were found to be prone to manipulation.
Bank of Communications Co., which is one of the lenders on the rate-setting panel in Hong Kong, said in an e-mailed statement that it hasn't received any inquiry from the city's regulator on the matter. Doris Fan, a Hong Kong-based spokeswoman at Standard Chartered, declined to immediately comment. Spokesmen for Citigroup Inc. in New York and Credit Agricole SA and Societe Generale SA in Paris also declined.
Press officials from BOC Hong Kong, Agricultural Bank of China Ltd., China Construction Bank Corp., Bank of East Asia Ltd. (23), Hang Seng Bank Ltd. (11), Shanghai Commercial Bank Ltd., China CITIC International Bank Ltd. and Industrial & Commercial Bank of China (Asia) Ltd. didn't immediately return e-mails and phone calls seeking comment.