The Anatomy of Three Scandals: Conspiracies, Beauty Contests and Sabotage in OTC Markets

Until the Great Recession, the largely unregulated over-the-counter (OTC) markets had received little attention from compliance officers, regulators, and lawmakers. Perhaps more important than the lack of regulatory framework as such, the markets were widely perceived to be sufficiently large, liquid, efficient and competitive to withstand manipulative and collusive attempts by traders and banks. However, the status quo was radically altered in 2012, when it was revealed that major international banks had systematically manipulated the world’s most widely used interest rate benchmark. The ‘LIBOR scandal’ was quickly followed by a ‘Forex scandal’ and the discovery of grave misconduct in a range of other OTC benchmarks and markets. At the time of writing, government bonds traded on electronic trading platforms are under particular scrutiny. This paper draws on the concepts of conspiracies (Smith 1776), beauty contests (Keynes 1936) and sabotage (Veblen 1921) to reflect on why it took so long for the scandals to be discovered.