Libor-rigging trial reveals concerns of bankers' body and Bank of England

By Estelle Shirbon

LONDON, June 5 (Reuters) - Evidence disclosed on Friday at the trial of a former trader accused of rigging Libor interest rates showed the trade body in charge of the benchmark rates and Bank of England officials were concerned about the integrity of the system as far back as 2007.

Then overseen by the British Bankers' Association (BBA), Libor rates are under scrutiny at the trial of Tom Hayes, a former trader at UBS (NYSEArca: FBGX - news) and Citigroup (NYSE: C - news) , who is accused of rigging the rates between 2006 and 2010 to increase his trading profits.

Hayes has pleaded not guilty to eight counts of conspiracy to defraud. His lawyers will set out a detailed defence later in the trial, which is scheduled to last into August.

At Friday morning's hearing, the focus was on discussions about the Libor-setting process that took place between the BBA, bankers and Bank of England staff in the run-up to and during the global financial crisis of 2008.

The Libor benchmark is used to price an estimated $450 trillion of financial contracts and loans worldwide.

Libor rates are calculated through an "honor system" in which a panel of banks report their estimated costs of borrowing from each other in different currencies over differing periods.

"I am starting to receive more and more comments and queries on the levels at which rates are currently setting," wrote John Ewan, then Libor manager at the BBA, in an internal email in November 2007 that was shown to the jury.

Ewan now works for Thomson Reuters as head of fixings business development. He started giving evidence to Hayes' trial just before the lunch break and was due to continue afterwards.

"These universally state that the rates are unrealistically low as the few offers of cash in the market are well above posted BBA Libor rates," Ewan continued in his email.

"Currently these queries are coming largely from hedge funds, non-contributing banks and the occasional broker but I understand that the Bank of England is informally asking questions of market participants and I know that this is an issue in which Paul Tucker is interested."

Tucker was the Bank's executive director for markets and also a member of the Monetary Policy Committee (MPC (KOSDAQ: 050540.KQ - news) ) at the time. He later became deputy governor.

'AVOID BAD PUBLICITY'

"I would very much like to avoid any further short-term bad publicity such as further hostile FT (Financial Times) articles but more importantly I do not want the fixings to lose credibility," Ewan went on to say in his email.

In another email a few days later, in December 2007, Ewan wrote: "I have heard from two sources that as yet unnamed contributor banks have offered to take U.S. dollars at 10 basis points above the rates submitted to the fixing process earlier in the day. I feel strongly that if this is true it should not be allowed to continue."

The jury was also shown emails between Ewan and several bankers with whom he discussed his concerns.

"I can confirm that there are banks setting Libors well below the level they are paying in the market. We are not one of them," wrote one banker in an email to Ewan.

Another wrote: "You don't want to be the first bank posting 30 basis points over everyone else."

The court was also shown email traffic between the BBA and the Bank of England about a paper on Libor governance that the BBA was working on. It was seeking feedback from the Bank.

Tucker was copied in on one of the emails, sent by Bank official Michael Cross to BBA staff on June 4, 2008.

Later that day, Ewan passed on feedback from the Bank to colleagues. One of the Bank's suggestions was to "remove 'enviable reputation for accuracy'" from passages about Libor.

The jury was also shown an internal email sent in May 2008 by Angela Knight, then chief executive of the BBA.

"Any change to Libor will cause mega probs (sic) except at fringes. I do not want to do a consultation. I do want to tick some of the commentary into touch. We need to reinforce Libor not change," she said in the email.

The Libor system has since been changed and the BBA is no longer in charge.

(Editing by Pravin Char)