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Banks pulling out of rate-setting panels in wake of Libor scandal

SINGAPORE/HONG KONG -- Banks are pulling out of panels that set interest rates in places like Singapore and Hong Kong, as they grow reluctant to expose themselves to possible allegations of manipulation for reference rates that are used relatively infrequently. 

The moves come in the weeks after Barclays settled allegations of manipulating the London interbank offered rate, a widely used series of reference rates underpinning borrowing globally.

On Monday, Royal Bank of Scotland said it had removed itself from a panel in Singapore that sets interbank lending rates there, following an internal review.

RBS had exited similar panels in Tokyo and Hong Kong, and Barclays PLC plans to pull out of the rate-setting panel for interbank lending in the United Arab Emirates.

"It's a defensive move to be less involved in less significant indexes just to minimize any type of exposure while (the Libor investigation) is going on," said Dan Geller, executive vice president of Market Rates Insight, which provides banks with pricing data.

Bank sources said that reputational risks from the Libor scandal have made it less attractive to belong to more obscure interbank lending rate panels.

"People are saying, hang on, what's the value in this for me? Especially for those currencies which may not be trading in high volumes," said a person at one of the banks contributing to one of the London rate-setting panels.

People at other banks also said they might seek to get out of the panels, which set daily rates such as the London interbank offered rate (Libor), a benchmark underlying anything from mortgages to complex derivatives.

Partaking in the panels was once deemed a prestigious task, but is now tainted with the suspicion of manipulation, particularly so for smaller, less liquid currencies.

"Any bank that wasn't thinking about it would be foolish," said another person. Both people asked not to be named because of the sensitive nature of the issue.

Dozens of interbank rates are set in financial centers across the world for a range of currencies. The rates are managed by their own organizations, though those in London and Brussels are by far the most influential.

In many jurisdictions, a group of banks contributes estimates of borrowing costs for various types of debt.

Like RBS, Bank of America Corp also did not appear on a daily page published by Thomson Reuters that lists contributors to Singapore's U.S. dollar and local currency interbank lending rates, also known as Sibor.

BofA spokesman Lawrence Grayson declined to comment on Bank of America's participation in rate-setting panels and did not respond to a question about why the bank did not appear on the Sibor list on Monday.

Spokespeople for Citigroup Inc and JPMorgan Chase & Co, which sit on various rate-setting panels across the globe, declined to comment on whether they had plans to exit any such panels.

An investigation into manipulation of Libor, which is referenced by some $360 trillion of derivatives, loans, and securities, started late last year. Last month, Barclays agreed to $453 million settlement with U.S. and UK regulators.

More than a dozen other banks are involved in the probe, which has thrown the spotlight on the discredited process for setting the rates that are the basis for hundreds of trillions worth of financial contracts.

Rates set in Tokyo are known as Tibor, those in Hong Kong as Hibor, and those in Brussels as Euribor.

RBS's decision to exit the Sibor panel on Monday was the latest sign that less prominent panels are coming under pressure.

"During the course of this review, we have decided to end our contribution to the rate setting panels for Sibor in Singapore," said RBS spokeswoman Patricia Choo.

Canada's financial regulatory body is also reviewing the way its Canadian Dealer Offered Rate, or CDOR, is set in light of the Libor scandal.

Bank of Nova Scotia, Royal Bank of Canada and Scotiabank declined to comment on whether they would pull out of the CDOR panel. Canadian Imperial Bank of Commerce did not respond to requests for comment.

In London, the British Banking Association oversees 10 different Libor rates. The BBA declined comment.

The London rates are obtained by asking the banks at which level they expect they can borrow from other banks. That became a problem when banks stopped lending money to each other in the credit crisis, but continued to provide quotes.

"What has emerged from this in terms of policy suggestions is that any rate which is based on estimates rather than actual financial transactions is highly dubious," said Justin O'Brien, director of the center for law, markets and regulation at the University of New South Wales in Sydney.

There are interest rate benchmarks based on lending between banks that work differently, though as yet there is no obvious successor to rates such as Libor, which have found their way into thousands of legal contracts.

Libor rates submitted by banks are compiled by Thomson Reuters, parent company of Reuters, on behalf of the British Bankers' Association.

Reuters exclusively reported on Sunday that Barclays planned to pull out of the rate-setting panel for interbank lending in the United Arab Emirates.

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