HIBOR Submission While Running a Receive-Fixed Book
Your bank is a HIBOR panel contributor. The treasury dealer responsible for the three-month HIBOR submission also runs a HKD 2.5bn receive-fixed interest rate swap book marked against three-month HIBOR. On Monday morning the book shows a large daily P&L gain if the three-month fixing sets 2bp higher. The submission is due at 11:00. The dealer's observed transactions include a three-month HKD deposit at 4.05% and a three-month HKD loan at 4.35%; the interbank market is quoted 4.15/4.25%. A sales colleague asks the dealer to keep the fix high because a client has a large receive-fixed position. The dealer's manager is on leave and the backup has not been trained. Bank policy says submissions must be based on actual funding transactions and expert judgement and must not be influenced by trading positions. There is no independent review of the submission, and the dealer has not attended benchmark-conduct training for two years.
1. Identify the conduct and control failures in this scenario under the TMA Code of Conduct and Practice.
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Several distinct failures are present, and they should be separated because they attract different remediation:
- Conflicts of interest: the same person submits the fixing and runs a large receive-fixed book whose P&L is directly sensitive to that fixing. Even without improper intent, the structure creates a conflict that must be managed, not ignored.
- Potential benchmark manipulation: submitting a rate to benefit a trading position, or adjusting it in response to a sales request, would breach the requirement that submissions reflect actual funding costs and expert judgement. The 2bp P&L gain is exactly the kind of incentive the Code prohibits.
- Misuse of client information: the sales colleague's request discloses a client's receive-fixed position. That information is confidential and should not be shared with the submitting dealer, let alone used to influence a benchmark.
- Supervision and segregation: the manager is on leave, the backup is untrained, and there is no independent review. A benchmark submission process without a trained backup and independent validation is a control gap.
- Training and attestation: two years without benchmark-conduct training suggests the firm's attestation and training framework is not operating.
The dealer's own deposit and loan transactions (4.05% and 4.35%) bracket the interbank market at 4.15/4.25%. A submission should be anchored on where the bank could borrow unsecured in the interbank market, not on its retail deposit or loan rates, and not on the P&L.
2. What should the dealer do at 11:00, and what should happen immediately afterwards?
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At 11:00: the dealer should submit an independent, transaction-based rate, likely around 4.20%, within the 4.15/4.25% interbank range, and record the rationale: observed deposit and loan transactions, market quotes, and the dealer's expert judgement. The dealer should not shade the submission up to help the receive-fixed book, and should not act on the sales colleague's client information. If the dealer believes the conflict is unmanageable in the moment, the correct action is to escalate to compliance and ask for an independent substitute submitter rather than submit while conflicted.
Immediately afterwards:
- Report the sales request and the conflict to compliance and to the manager's manager; do not delete the chat or email.
- Recuse the dealer from the submission until the conflict is reviewed, and appoint a trained, independent submitter.
- Preserve records of the submission, the transaction inputs and all communications.
- Ask compliance to review whether the sales colleague's conduct breached confidentiality and market-conduct rules, and whether any client or counterparty was disadvantaged.
- Check whether other submissions were made by the same conflicted dealer and whether any P&L pattern is consistent with benchmark influence.
The dealer should also document that the sales request was declined, because an undocumented oral request is exactly the kind of conduct that surveillance will later struggle to reconstruct.
3. Design three specific controls to prevent recurrence, explaining how each addresses the root cause.
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Control 1: Segregate submission from trading and require independent validation. Move the HIBOR submission to a treasury or operations function that does not run the receive-fixed book, with a trained backup and a named independent reviewer. The reviewer checks the submitted rate against a defined input hierarchy (interbank quotes, executed funding transactions, central-bank facility rates) and signs off before 11:00. This addresses the conflict of interest and the untrained-backup gap.
Control 2: Input hierarchy and contemporaneous rationale. Require the submitter to record the transactions and quotes used, the rate chosen and the reason for any deviation from the interbank mid. Prohibit the use of deposit or loan rates unless they are genuinely representative of unsecured interbank funding. This addresses the risk that the dealer uses 4.05% or 4.35% selectively to move the fix.
Control 3: Communications surveillance, training and attestation. Monitor chat and email for requests to move fixings, including from sales and trading, and escalate any client-information leakage. Reinstate annual benchmark-conduct training with a signed attestation, and add a rule that client positions are shared only on a need-to-know basis. This addresses the sales request, the two-year training gap and the cultural risk that a fixing is treated as a favour rather than a market input.
These controls should be tested by internal audit, and the firm should be able to show that the submission was independent of the receive-fixed book on every business day, not just on the day of the incident.