Financial crime in OTC markets

Until the Great Recession, the largely unregulated over-the-counter (OTC) markets received relatively little attention from compliance officers, regulators, and lawmakers. More broadly, the markets were widely perceived to be sufficiently large, liquid, and competitive to withstand manipulative and collusive attempts by traders and banks. However, this status quo was radically altered with the so-called LIBOR scandal in 2013, or the revelation that major international banks had systematically manipulated the world’s most widely used interest rate benchmark. The LIBOR scandal was quickly followed by the “Forex scandal” and discoveries of serious misconduct in a range of other OTC benchmarks and markets. This chapter explores financial crime in OTC markets through the lens of three high-profile case studies involving LIBOR, foreign exchange, and government bonds, respectively. Particular emphasis is put on the nature of money-related markets as decentralised, bank-oriented and their inherent link to the central bank, government, and citizens. Most importantly, we demonstrate why it took so long to discover that the OTC markets were unsustainable and far from immune from criminal behaviour.