Canada’s six biggest banks accused of rigging rate to boost profits

The proposed class-action dispute, which names six Canadian banks and three foreign lenders, alleges the CDOR violations took place for almost seven years

Bloomberg News

Doug Alexander and Kartikay Mehrotra

A Colorado-based pension fund accused Canada’s six biggest banks and three foreign lenders of conspiring to manipulate a Canadian interest rate benchmark to boost “illegitimate profits” on derivatives trades for several years until 2014.

The Fire & Police Pension Association of Colorado alleged in a New York court filing that the banks sought to boost their earnings from derivatives trades by manipulating the Canadian Dealer Offered Rate, or CDOR, a benchmark lending rate. The alleged violations, including conspiracy under the U.S. Sherman Act and manipulation of the Commodity Exchange Act, took place for almost seven years, according to the filing.

The proposed class-action dispute names Toronto-Dominion Bank, Royal Bank of Canada, Bank of Nova Scotia, Bank of Montreal, Canadian Imperial Bank of Commerce and National Bank of Canada, as well as HSBC Holdings Plc, Bank of America Corp. and Deutsche Bank AG. All the banks declined to comment on the matter.

The fund, which manages about US$4.66 billion, claims banks “reduced the amount of interest owed,” resulting in investors paying more or receiving less than the amount generated through trading derivatives based on CDOR. The pension fund said it made US$1.2 billion in CDOR-based derivatives trades over the period.

Suppressed Rates

“Defendants conspired to suppress CDOR by making artificially lower submissions that did not reflect the true rate at which they were lending Canadian dollars in North America,” according to the Jan. 12 filing in U.S. District Court for the Southern District of New York. “Economic analyses show that defendants consistently made CDOR submissions well-below prevailing Canadian dollar money market rates, inexplicably offering to lend for less than what it cost them to borrow funds.”

The banks held on average more than US$1 trillion in CDOR-based swap contracts with U.S. counterparties during the period covered by the class-action suit, according to the filing.

Representatives for the Canadian Bankers Association, the Investment Industry Regulatory Organization of Canada and the Office of the Superintendent of Financial Institutions declined to comment.

CDOR is the interest rate benchmark used to set terms on short-term loans of less than a year. It’s set by Thomson Reuters each day based on submissions from the banks and used to determine rates on bankers’ acceptance contracts.

Canada Response

Canadian regulators took steps to prevent any potential manipulation of the rate in the 2014 in the wake of allegations that global banks had rigged the Libor benchmark in the U.S. and Europe.

OSFI, as the bank regulator is known, said in 2014 that it would begin supervising the governance and controls surrounding the banks’ CDOR submission process and outlined expectations for their work, including providing rates in a consistent manner.