Major Banks Facing Trillions More in Fines Amid LIBOR Appeal

The Manhattan located U.S. Court of Appeals for the Second Circuit has just issued a ruling against 16 major financial institutions that could jeopardize the banking industry’s viability in the coming quarters.

New York’s court of appeals has issued a stark warning as it overruled the decision that major banks are not guilty in an antitrust case. The ruling has the potential to dramatically shift the business of the financial institutions which are targeted by investors who have been trading LIBOR (London Interbank Offered Rate) through the facilities operated by the defendants.

Amongst the financial institutions implicated in the case we see Bank of America, Barclays, BNP Paribas, Citigroup, Credit Agricole, Credit Suisse, Deutsche Bank AG, HSBC Holdings, J.P. Morgan Chase, Norinchukin Bank, UBS, Rabobank, Bank of Tokyo-Mitsubishi UFJ, Royal Bank of Canada, Royal Bank of Scotland, Lloyds and Societe Generale.

Anti-Trust Case Sent Back to District Court

The court’s judgement overrules the district court and returns an anti-trust case filed by a number of plaintiffs that include major investment and pension funds. According to the ruling the district court’s judgment is vacated and the case is remanded for further proceedings.

The antitrust lawsuit alleges that the investors have suffered financial damages due to buying securities whose value was tied to the value of the LIBOR. The ruling could be a game changer for major financial institutions as the case was previously dismissed on the grounds that investors didn’t provide proof of damages.

In addition, the appeals court ruling also considers another issue - the adequacy of suing the banks as the parties that caused the financial damages to the plaintiffs. If the court determines that they are the correct parties, the claim of investors could qualify for triple damages, that are likely to cause major harm to the financial industry.

Banks Facing Triple Damages

In the ruling the U.S. Court of Appeals in New York states that ”requiring the banks to pay treble damages to every plaintiff who ended up on the wrong side of an independent Libor‐denominated derivative swap would, not only bankrupt 16 of the world’s most important financial institutions, but also vastly extend the potential scope of antitrust liability in myriad markets where derivative instruments have proliferated.”

Major financial institutions worldwide have already paid almost $9 billion in fines to rectify the LIBOR situation after global investigations by financial regulators identified that the LIBOR rate was being rigged by the major trading desks.

According to the lawsuit, the LIBOR rate has been depressed since the start of 2007 with the value of any investments that have been tied to the interest rate being severely impacted. Amongst the investments the plaintiffs identified asset Swaps Swaps Swaps can be defined as a derivate contact composed of two parties that exchange to cash flow between two separate financial instruments.They are generally divided into two categories. This includes contingent claims (options) and forward claims, where forward contracts, swaps, and exchange-traded funds (ETFs) are exchanged. Commodity price, equity price, interest rate, and foreign exchange rate are common variables used as one of the cash flows in swaps upon initiation. Different Types of Swaps Swaps can be defined as a derivate contact composed of two parties that exchange to cash flow between two separate financial instruments.They are generally divided into two categories. This includes contingent claims (options) and forward claims, where forward contracts, swaps, and exchange-traded funds (ETFs) are exchanged. Commodity price, equity price, interest rate, and foreign exchange rate are common variables used as one of the cash flows in swaps upon initiation. Different Types of Swaps Read this Term, collateralized debt Obligations Obligations In finance, an obligation is a financial responsibility where the terms of a contract must be met. Should an obligation between parties fail then the party who is at default may face legal action. In this scenario, the guilty party will not only have to agree to pay the set amount to fulfill the contractual arrangement but may also be responsible for covering all legal proceedings cost. Routine payments or outstanding debt of any kind are considered financial obligations, so if someone owes you In finance, an obligation is a financial responsibility where the terms of a contract must be met. Should an obligation between parties fail then the party who is at default may face legal action. In this scenario, the guilty party will not only have to agree to pay the set amount to fulfill the contractual arrangement but may also be responsible for covering all legal proceedings cost. Routine payments or outstanding debt of any kind are considered financial obligations, so if someone owes you Read this Term (CDOs) and forwards.

The ruling of the court was unanimous, with the case now being returned to District Judge Naomi Reice Buchwald.