House of Commons Treasury Committee

Fixing : some preliminary findings

Written Evidence

List of written evidence

Page

1 Letter to the Chairman from , Chief Executive, , 28 June 2012 4 2 Barclays—Supplementary information regarding Barclays settlement with the Authorities in respect of their investigations into the submission of various interbank offered rates (AMENDED), 3 July 2012 8 3 Letter to the Chairman from , Chairman, Barclays, 9 July 2012; together with attachments: Letter to Marcus Agius from , Chief Executive, FSA, 15 September 2010, letter to Marcus Agius from Lord Turner, Chairman, FSA, 10 April 2012, letter to Lord Turner, FSA, from Marcus Agius, 18 April 2012 32 4 Email to John Mann MP from Jackie Keating, Public Information and Enquiries Group, of England, re: FOI request, 9 July 2012 42 5 —submission re: John Mann MP’s FOI request, 9 May 2012 + attachments 44 6 Letter to the Chairman from Bob Diamond, former Chief Executive of Barclays, 10 July 2012 59 7 FSA submission—Key Messages, FSA Presentation to the Barclays plc Board—9 February 2012—Andrew Bailey, received 10 July 2012 60 8 FSA submission—Extract from Board Meeting held on 9 February 2012 (with redactions), received 10 July 2012 62 9 Letter to the Chairman from John Varley, a former of Chief Executive of Barclays, 16 July 2012 64 10 Letter to John Mann MP from Jackie Keating, Public Information and Enquiries Group, Bank of England, 16 July 2012, together with attachments:Email to Bob Diamond from Paul Tucker, 26 May 2008, email to Bob Diamond from Paul Tucker, 28 May 2008, email to Paul Tucker from Bob Diamond forwarding an email to the Barclays Board from Jonathan Stone, Barclays Treasury, re: BoE—Liquidity, 17 December 2008 65 11 BBA submission: response to the Committee’s request for written evidence on LIBOR, July 2012 69 12 Letter to the Chairman from Marcus Agius, Chairman, Barclays, re: further info requested by the Cttee following is oral evidence session, 20 July 2012 129 13 Letter to the Clerk of the Treasury Committee from Marcus Agius, Chairman, Barclays, re: details of the £20 million of awards that were forgone by Bob Diamond, 20 July 2012, together with enclosure: Table: Outstanding deferred and long term awards for Bob Diamond 131 14 Barclays submission: Email to Compliance re: Sterling , 29 October 2008, referred to by Mr Jerry del Missier in his evidence to the Committee on 16 July, together with response from Mr Stephen Morse, 3 November 2008. (This is the exchange produced to the authorities and addressed by the FSA at paragraphs 177–179 of the FSA’s Final Notice.) received 23 July 2012 134 15 Letter to the Chairman from Paul Tucker, Deputy Governor, Bank of England, re: response to Mr Hosie’s request for further information at the oral evidence session on 9 July, 16 July 2012 135 16 BBA submission: Suggestions for the Evolution of BBA LIBOR—A Discussion Paper, 24 July 2012 138 17 Letter to the Clerk of the Treasury Committee from Robert Zammit, Assistant Private Secretary to the Governor, Bank of England, 23 July 2012, together with attachment: The Bank’s record of the meeting with the BBA and commercial on 25 April 2008 142 18 Letter to the Chairman from Lord Turner, Chairman of the FSA, re: contacts or awareness of LIBOR manipulation 2007/08, 24 July 2012 147 19 Letter to the Chairman from Marcus Agius, Chairman of Barclays Bank, with clarification regarding Bob Diamond’s oral evidence, 25 July 2012 150 20 BBA submission: Note on discussion of ‘Evolution of LIBOR’ at Foreign Exchange & Money Markets Committee meeting on 19 May 2008, received 25 July 2012 153 21 List of the Barclays attendees in the Board meeting with Andrew Bailey and other FSA officials 162 22 Letter to the Chairman from Marcus Agius, Chairman of Barclays, and enclosures with redactions made to protect names and contact details of FSA officials, 30 July 2012, letter to Marcus Agius from the FSA re: Barclays Group: Governance Review, 11 January 2012, and letter to the FSA from Marcus Agius re: Governance Review, 10 February 2012 163 23 ‘Review of the LIBOR fixing process’ dated 22 May 2008. (Referred to in Lord Turner’s letter of 24 July 2012) 171 24 Letter from John Varley in response to the Chairman’s letter, dated 2 August 2011 173

4 5 6 7 8 Supplementary information regarding Barclays settlement with the Authorities in respect of their investigations into the submission of various interbank offered rates (AMENDED) Context

In anticipation of Bob Diamond’s appearance before the Treasury Committee tomorrow, 4 July, 2012, in the interest of clarity and transparency we set out on behalf of Barclays a brief summary of the salient events and the actions that Barclays has undertaken since becoming aware of them. These explanations are in no way intended to excuse any of the events that occurred. These events should never have taken place, and Barclays deeply regrets that they did.

The structure of the material that follows is intended to provide a framework through which to interpret the various events. To aid that, it also includes:  A chronology covering the four issues examined by the investigating authorities. This is important to avoid the issues being conflated and confused. It is particularly important to recognise that the trader conduct was separate from the conduct during the credit crisis and characterised differently by the Authorities. The actions of the traders were regarded as an attempt to manipulate ultimate reference rates. The actions of Barclays during the credit crisis were not.  A timeline summary of the principal documented contacts between Barclays and the Authorities during the financial crisis period relating to LIBOR submissions. We believe that this chronology shows clearly that our people repeatedly raised with regulators concerns arising from the impact of the credit crisis on LIBOR setting over an extended period.  A graph showing our 3 month USD LIBOR submissions relative to others during periods of the crisis and the occasions on which our submissions were excluded from the rate setting process as too high.

The investigation

The bank has conducted an exhaustive internal investigation over more than three years supported by external counsel. The bank has reviewed 22 million documents from over 200 custodians, over 1 million audio files and conducted more than 75 interviews. The results of the reviews were shared with the Authorities, who in turn made their own requests for documents and interviews.

In total, the bank has invested nearly £100m to ensure that no stone has been left unturned. The bank’s exceptional level of cooperation was expressly recorded by each of the Authorities, and was described by the DoJ as “extraordinary and extensive, in terms of the quality and types of information provided” and ”the nature and value of Barclays cooperation has exceeded what other entities have provided in the course of this investigation.” That cooperation has led to Barclays being the first to reach resolution of these issues. It ironic that there has been such an intense focus on Barclays alone, caused by our being first to settle in the midst of an industry-wide, global investigation.

1 9 Supplementary information regarding Barclays settlement with the Authorities in respect of their investigations into the submission of various interbank offered rates (AMENDED)

Disciplinary action

Many of the individuals concerned in the trader conduct, in particular, are in fact no longer with the bank. For certain individuals that remain, we took action to withhold bonus payments pending the outcome of the investigation. Now that the investigation is complete, and the full Barclays facts known, as we advised the Authorities, we are conducting a review of each individual’s conduct to assess their accountability and to determine appropriate action. The full range of tools will be made available within this review.

29 October 2008 Communication from Bank of England

During October 2008, in the wake of the collapse of , when liquidity conditions had tightened acutely, Barclays raised its US Dollar LIBOR submissions more significantly than other panel members. In the month of October 2008, in particular, Barclays US Dollar LIBOR submissions for the 3 month maturity were the highest or next highest of the panel on every single day of the month and therefore excluded from the calculation of LIBOR. Barclays did not understand why other banks were consistently posting lower submissions; Barclays firmly believed that the other panel members were not, in fact, funding at a lower cost than Barclays, and we were disappointed that no effective action was taken, notwithstanding our having raised these issues with various Authorities during the whole financial crisis period as outlined in the attached timeline.

As one would expect, Barclays (including Bob Diamond and Jerry del Missier) was in close contact with the Bank of England and other Authorities about the liquidity crisis generally. On 29 October 2008, Bob Diamond received a call from Paul Tucker, the Deputy Governor of the Bank of England. The substance of that call was captured by Bob Diamond via a note prepared at the time. A copy of that note is appended to this document; it was circulated to John Varley, then Barclays Chief Executive, and Jerry del Missier, then President of Barclays Capital.

Subsequent to the call, Bob Diamond relayed the contents of the conversation to Jerry del Missier. Bob Diamond did not believe he received an instruction from Paul Tucker or that he gave an instruction to Jerry del Missier. However Jerry del Missier concluded that an instruction had been passed down from the Bank of England not to keep LIBORs so high and he therefore passed down a direction to that effect to the submitters.

There was no allegation by the Authorities that this instruction was intended to manipulate the ultimate rate. The bank’s submissions had consistently been excluded from the LIBOR calculation. Moreover the instruction became redundant in a matter of days as market conditions improved.

2 10 Supplementary information regarding Barclays settlement with the Authorities in respect of their investigations into the submission of various interbank offered rates (AMENDED) The FSA investigated Jerry del Missier personally in relation to these events and closed the investigation without taking any enforcement action.

Ongoing legal constraints

Barclays welcomes the Treasury Committee’s enquiry into these matters and the opportunity for Bob Diamond and others, including Non-Executive Directors, to provide Barclays perspective on these issues directly to you. In that regard, it is important that the Committee understand that, in certain areas, Bob Diamond’s evidence will necessarily be subject to some constraints.

Firstly, the bank currently has a process underway to assess what action may be necessary in respect of individuals involved. As much as possible, the bank must respect the confidentiality of the individuals concerned whilst processes remain outstanding. There are also ongoing criminal investigations and legal proceedings.

Secondly, as a result of him being a witness to events around the credit crisis, the direct involvement of Bob Diamond (as well as some other members of senior management) in the conduct of this investigation was extremely limited and he did not receive substantive reports of the investigation. This is normal Bank procedure for such investigations. Bob Diamond first received copies of the settlement documents on Friday, 20 June, 2012.

Apart from those areas in which he was directly involved, Bob Diamond’s answers may be based on briefings since receipt of the settlement documents on some quite complex factual issues occurring over a number of years.

It may therefore be necessary for Barclays to revert to the Committee in writing on particular points. If this is necessary, Barclays will ensure that the information you require is provided wherever possible and as quickly as possible.

Culture

Barclays is proud of the service that we provide our customers and clients; and the benefit that we bring through that to the communities in which we live and work.

The traders’ behaviours captured within the settlement documents are not representative of the values and standards to which the vast majority of the 140,000 people that work at Barclays operate every day. Those colleagues serve with integrity; pride; and the utmost probity. They have been badly let down by the actions of a few.

3 11 Supplementary information regarding Barclays settlement with the Authorities in respect of their investigations into the submission of various interbank offered rates (AMENDED) Barclays takes its responsibilities in fixing the issues identified in the investigations seriously; as part of that, we have actively supported the investigating authorities, and, where possible, robust action has or will be taken to hold those responsible to account.

We have a great deal to do to win back public trust – as a bank; and as an industry. Taking clear and immediate actions to ensure accountability is fundamental to that. Our internal disciplinary process is proceeding rapidly. More generally, the Board has commissioned an independent review of Barclays broader business practices. That review will be led by a senior external individual and will both externally publish its findings and develop a mandatory code of conduct for the entire organisation.

This is the start of a long journey. We are determined that we will earn back that trust.

The Committee’s enquiry will be an important part of that process.

Chronology of key issues

A. 2005 to 2009 – Trader requests  Certain traders sought to manipulate Barclays LIBOR submissions by sending requests to submitters. The majority of these were sent during 2005 to Sept 2007 and sporadically in 2008/2009. There were no further requests to submitters after May 2009.  There was no knowledge by anyone in the bank above desk supervisor level of this conduct at the time. Senior management were not aware.  Certain instances of these requests were discovered in the latter part of 2009 after the bank launched an internal review of its USD LIBOR submissions following the commencement of an industry-wide investigation concerning USD LIBOR initiated by the CFTC in October 2008. As the investigation widened further requests were identified, including in relation to .  When discovered, the activities were promptly disclosed to the authorities.

B. Sept 2007 to April 2008 – Credit crisis: Media and market speculation  During the credit crisis, the bank had concerns about inaccurate press speculation regarding its liquidity caused by the bank's high LIBOR submissions relative to the lower submissions of other banks.  During periods of acute market stress in late 2007 and early 2008, Barclays USD LIBOR submissions increased relative to those of other banks. The FSA found that Barclays 3 month USD LIBOR submissions were within the highest 4 or tied with one of the highest 4 on 89% of occasions between 1 September 2007 and 31 December 2008. Barclays high LIBORs came under scrutiny relative to the low LIBORs of other banks.  Barclays did not have a liquidity problem, and senior management were concerned about the unfounded negative perceptions.

4 12 Supplementary information regarding Barclays settlement with the Authorities in respect of their investigations into the submission of various interbank offered rates (AMENDED)  Barclays believed that other banks were making LIBOR submissions that were too low and did not reflect market conditions.  Less senior managers gave instructions to Barclays submitters to lower their LIBOR submissions. The origin of these instructions is not clear.  The evidence shows that the intent was to protect Barclays from the unfounded negative perceptions by bringing Barclays LIBORs closer to the pack but not to affect the ultimate rate. The US Dollar LIBOR submissions were still so high, that they were regularly being omitted from the LIBOR calculation (see the attached document Barclays LIBOR submissions relative to the panel).  During this period, Barclays was consistently raising concerns with the BBA, questioning why other banks’ LIBOR submissions appeared to be so low compared to those of Barclays. Many of these concerns were based upon Barclays observations that other banks were making submissions which were lower than levels at which they appeared to be undertaking transactions. Subsequent research by the New York Federal Reserve staff members concluded that banks LIBOR quotes were systematically below their borrowing rates by 39 basis points after the Lehman bankruptcy. Barclays own submissions for tenors of 1 month to 1 year LIBOR were higher than actual Barclays trades on 97% of the occasions when Barclays had actual trades during the financial crisis.  Barclays also raised concerns with the FSA, the Bank of England and the US Federal Reserve. The documented occasions on which Barclays made such contact are illustrated in the attached document Timeline of regulatory contact.  The bank first discovered the issues relevant to the period regarding the credit crisis during the early stages of its investigation in 2009 and the bank has since thoroughly investigated and reported to the authorities regularly on these issues.  The Authorities have not alleged any intention to manipulate the ultimate LIBOR rates as a result of this conduct during the financial crisis period.

C. October 2008 – Credit crisis: Bank of England  In October 2008, following the collapse of Lehman Brothers, liquidity once again rapidly dissipated. Barclays increased its USD LIBOR submissions resulting in it being at the top of the pack again.  During October 2008 Barclays was the highest or one of the higher submitters in the substantial majority of the time. Barclays US Dollar LIBOR submissions for the 3 month maturity were the highest or next highest of the panel on every single day of the month, and therefore excluded from the calculation of LIBOR.  As one would expect Barclays (including Bob Diamond and Jerry del Missier) was in close contact with the Bank of England and other Authorities about the liquidity crisis generally. There was a call from the Bank of England to Bob Diamond on 29th October 2008. A note of that conversation is attached to this document.  The content of that conversation was passed to Jerry del Missier.

5 13 Supplementary information regarding Barclays settlement with the Authorities in respect of their investigations into the submission of various interbank offered rates (AMENDED)  Bob Diamond did not think he had received an instruction from Paul Tucker or that he gave an instruction to Jerry del Missier.  However Jerry del Missier concluded that an instruction had been passed down from the Bank of England not to keep LIBORs so high. He passed down an instruction to that effect to the submitters.  The intent was not to affect the ultimate LIBOR rate as Barclays was regularly being excluded from the calculation.  This instruction became redundant after a few days as liquidity flowed back into the market.  Again, the Authorities have not alleged any intention by Barclays to manipulate the ultimate LIBOR rates as a result of this conduct during the financial crisis period.  The FSA investigated Jerry del Missier personally in relation to these events and closed the investigation without taking any enforcement action.

D. Jan 2005 to May 2010 – systems and control issues and compliance failings  The bank had not anticipated the increased risk around the LIBOR process, generated in periods of very low liquidity. Barclays, along with many other market participants, viewed LIBOR as low risk, and the controls which were in place were therefore inadequate.  As the investigation progressed and findings emerged, systems and controls were enhanced to prevent recurrence.

6 14 Supplementary information regarding Barclays settlement with the Authorities in respect of their investigations into the submission of various interbank offered rates (AMENDED)

7 15 Supplementary information regarding Barclays settlement with the Authorities in respect of their investigations into the submission of various interbank offered rates (AMENDED)

8 16 Supplementary information regarding Barclays settlement with the Authorities in respect of their investigations into the submission of various interbank offered rates (AMENDED)

9 17 Supplementary information regarding Barclays settlement with the Authorities in respect of their investigations into the submission of various interbank offered rates (AMENDED)

10 18 Supplementary information regarding Barclays settlement with the Authorities in respect of their investigations into the submission of various interbank offered rates (AMENDED)

11 19 Supplementary information regarding Barclays settlement with the Authorities in respect of their investigations into the submission of various interbank offered rates (AMENDED)

12 20 Supplementary information regarding Barclays settlement with the Authorities in respect of their investigations into the submission of various interbank offered rates (AMENDED)

13 21 Supplementary information regarding Barclays settlement with the Authorities in respect of their investigations into the submission of various interbank offered rates (AMENDED)

14 22 Supplementary information regarding Barclays settlement with the Authorities in respect of their investigations into the submission of various interbank offered rates (AMENDED)

15 23 Supplementary information regarding Barclays settlement with the Authorities in respect of their investigations into the submission of various interbank offered rates (AMENDED)

16 24 Supplementary information regarding Barclays settlement with the Authorities in respect of their investigations into the submission of various interbank offered rates (AMENDED)

17 25 Supplementary information regarding Barclays settlement with the Authorities in respect of their investigations into the submission of various interbank offered rates (AMENDED)

18 26 Supplementary information regarding Barclays settlement with the Authorities in respect of their investigations into the submission of various interbank offered rates (AMENDED)

19 27 Supplementary information regarding Barclays settlement with the Authorities in respect of their investigations into the submission of various interbank offered rates (AMENDED)

20 28 Supplementary information regarding Barclays settlement with the Authorities in respect of their investigations into the submission of various interbank offered rates (AMENDED)

21 29 Supplementary information regarding Barclays settlement with the Authorities in respect of their investigations into the submission of various interbank offered rates (AMENDED)

22 30 Supplementary information regarding Barclays settlement with the Authorities in respect of their investigations into the submission of various interbank offered rates (AMENDED)

23 31 Supplementary information regarding Barclays settlement with the Authorities in respect of their investigations into the submission of various interbank offered rates (AMENDED)

24 32 33 34 35 36 37 38 39 40 41 42 43 44

SUBMISSION TO THE TREASURY COMMITTEE FROM THE BANK OF ENGLAND

Last week, John Mann MP submitted an FoI request to the Bank for:

‘copies of emails and transcripts of telephone conversations between Deputy Governor, Paul Tucker and Bob Diamond, Chief Executive of Barclays between 1 October 2008 and the 30 November 2008.’

So that the information can be available to all members of the Treasury Committee, the Bank’s response to that request is attached. As you will note, the Bank does not hold its own records, or transcripts, of phone conversations between Mr Tucker and Mr Diamond.

In addition, the Treasury Committee, during the hearing with Mr Diamond on Wednesday 4 July, expressed interest in the meaning of ‘senior figures within Whitehall’, as described in Mr Diamond’s file note of 29 October 2008. The Bank has performed a search of references to ‘Libor’ in communications between Mr Tucker and Government ministers and officials between July and December 2008. The only references held by the Bank are in emails between Mr Tucker and Jeremy Heywood, then Permanent Secretary at Number 10. Those emails are also attached, in case the Committee would find them to be useful.

Bank of England

9 July 2012

45

BANK OF ENGLAND

Mr John Mann MP Public Information and Enquiries Group House of Commons Public Communications and Information Division via email to: T 020 7601 4878 [email protected] F 020 7601 5460 [email protected]

9 July 2012

Please quote ref. FF 26843 on all correspondence

Dear Mr Mann

Thank you for your letter of 2 July under the Freedom of Information Act 2000 ('Fol Act1) in which you requested:

'copies of emails and transcripts of telephone conversations between Deputy Governor, Paul Tucker and Bob Diamond, Chief Executive of Barclays between 1 October 2008 and the 30 November 2008.'

The Bank holds a small number of documents within the scope of your request and these are attached. We have not included a copy of Mr Diamond's note of his telephone conversation with Mr Tucker on 29 October, as this is already in the public domain and is exempt from disclosure under section 21 Fol Act (information accessible by other means). Please note also, in relation to the final document in the attachment (email of 30 October 2008 commenting on two then recent debt issues), that we have removed details of the biggest orders as such information is exempt from disclosure under section 41 Fol Act (information provided in confidence).

We have forwarded a copy of this letter and attachments to the Treasury Committee via the Clerk of the Committee.

Yours sincerely

Jackie Keating Public Information and Enquiries Group

Your right to complain under the Fol Act If you are unhappy with the Bank's response, you may ask for that decision to be reviewed internally. In order to do so, please set out the grounds for your appeal and send it to Wendy Galvin, PIEG (HO-M), Public Communications & Information Division, Bank of England, Threadneedle Street, London, EC2R 8AH or by email to [email protected] for the attention of Wendy Galvin.

If you are not content with the outcome of the internal review, you have the right to apply directly to the Information Commissioner for a decision. The Information Commissioner can be contacted at The Information Commissioner's Office, Wycliffe House, Water Lane, Wilmslow, Cheshire, SK9 5AF.

Bank of England, Threadneedle Street, London EC2R 8AH T +44 (0)20 7601 4444 www.bankofengland.co.uk 46

From: Paul.Tuckei\ Sent: Wednesday, "October 22-, 200812:17 PM . To: bob.diamorid. john.varley Subject: Re: C!d I talk to ona or otITef oTyoirabbu't libor pi

In a meeting right now, sonny. Will call'when out

•- original Message From: bob.diamond To: Tucker., Paul-; john.varleyt Sent: Wed Oct 22 16:37:46 2098 Subject: RE: Cld t talk 'to one or other of you about libor pi

*********************************************************** .• This email, has reached the Bank via the Internet or a'n external network ###***###* ******************#****#******"******************* 'Calling right now -----Original Message----- Fromr Tucker; Paul Sent: Wednesday, October 22,.2008 i0:56 AM To: 'john.varley Diamond, Bob; Subject: Cld I talk to one or other of you about libor' pi

Sqrry-to ;bother you but I think mark .d is away; Its a slightly sensitive point Thanks Paul 47

Tucker, Paul Sent: .24 October 2008 15:25 To: mark.dearlove( Jonathan.stone Ccs bob.dlamond ; Cross, Michael

Mark, Jon

recover, and where the changed circumstances matter. If we may, my office will be in touch to fix up a meeting over the next week. I mean a bilateral meeting.

Many thanks

Best

Paul 48

RE: Struck that your govt gnteed bond was issued at around 140 over gilts bob.diamond

Sent: 27 October 2008 09:33 Toi Tucker, Paul

Are back today? Happy to come see you, or talk over the phone, whichever 3UftS.

—-Original Message—- From: Tucker, Paul Sent: 26 October 2008 11:06 To: Diamond, Bob: Barclays Capital Subject: Re: Struck that your govt gnteed bond was issued at around 140 over gilts

f'm abroad. So cant meet I'm afraid. But eld talk by phone in about an hour. Or is it better face to face?

-— Orfglnal Message — From: bob.diamond To: Tucker, Paul Sent: Sun Oct 26 10:58:23 2008 Subject: RE: Struck that your govt gnteed bond was Issued at around 140 over gilts

This email has reached the Bank via the Internet or an external network

You around for a chat today or In the morning? I am In London, maybe I can come to see you?

-—Original Message—- From: Tucker, Paul Sent: 25 October 2008 11:32 To: Diamond, Bob: Barclays Capital Subject: Struck that your govt gnteed bond was Issued at around 140 over gills

That's a lot

Paul 49

bob.dlamond. Sam 30 October 2008 10:48 Ta; Tucker, Paul Cs: AndrewJane*

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>Ksy Points; SFSsessasas-

£!& UK Govt 3tead bank issues have been successful* launched - Barc,y9 Capita, has been M

:SKpDS*9itoping) curve is being constructed.

:The worid has M watching ,he — and the M* is «--»* Po— - UK , iightin, the way for others to follow.

^Transaction details:

> Mc^« of Her M^. Tr.as.ry, as * out in >Guarant3a: F the Dead of Guarantee on 13 0ot2008 a available at > > yiww.dmo.aov.uk >Ratings: >Status: ^ DebtT3uanc3 Programme, pursuant ^ "^norandur, >Docs; (20/10/08) London listing, Denoma €^0k4-i!<, Rsg S only > €3bn 50 Government Guaranteed Issues Page 2 of 3

>Pay Date: 27 Oct 2008 >MaturIty: 27 Oct 2011 >Coupon: 4.25% annual, Act/Act ICMA >Re*offer: 3-yr mid swaps + 25 bps OBL149 + 119.9 bps >Re-offer px: 99.967 >ISIN: XS0395325144 >

> •- >The first of undoubtedly many such trades. After a weak of discussions between sales, trading, syndicate, and Ibd and feedback from potential investors, we launched a 3 year € transaction. >The transaction was announced on Tuesday afternoon, and by the end of the day we had IOI of €2bn. On Wednesday morning the orderbook was officially opened and price guidance was released at ms+25bps area. The orderbook grew quickly and reached over €4.0bn within less than two hours of bookbulldlng, allowing the issuer to price a €3.0bn trade in line with guidance at ms+25bps. >The book was well diversified and of high quality with 167 investors participating. The bulk of the paper went to asset managers, with 47.8%, followed by banks with 27.3%. UK, Swiss and French accounts took the majority of the bonds, with 27.7%, 15.2% and 13.5% respectively. Biggest orders wereQ " a > > >lssuer: Bank of Scotland Pic > >Quarantor: The Commissioners of Her Majesty's Treasury >Guarantee Unconditionally and Irrevocably as set out In Deed of Guarantee > of 13 Oct 2008 as amended & available at www.dmo.aov.uk >Ftetlngs: Aaa/AAA/AAA (expected) >Status: Senior, Unsecured, Unsubordinated, 0% risk weighted In UK >Docs; EMTN programme, pursuant to Info memorandum (15/10/08) > London listing, Denoma €50k+1k, Reg S only >Start/Flnal: November 5th >SEze: €3bn >Coupon: 3.875%, annual, ActfAct ICMA >Pay-Date:—5Nov-2008 >Maturlty: 5Nov2010 >Re-offer: 2yr mid swaps + 20 bps BKO 4% 2010 +136.3 bps > ms @ 3.71% BKO4%2011 @ 102.59 > > >A tough but successful trade, which was announced yesterday - without official guidance. It was whispered at MS+20, and official guidance of MS+20 area was announced this morning - despite having overnight interst of €2bn, the banks remained cautious. > r >We finished with an orderbppk of almost f4v6bn and 12Q prefers A- J Geographically, the UK came In for 25%, France 20%, 10%, and the rest was quite evenly split around Europe with a little Interest from Asia. Banks came in for 40% and Asset Managers came in for 25%. There was some Interest from Central Banks - about 3%. 51

Re: PERSONAL - IS THIS WRONG? [UNCLASSIFIED] [Non-Record] Tucker, Paul Sent: 30 October 200813:32 Toi jheywoad:

—- Original Massage —- From: Jeremy Hsywaad To:Tueker, Paul Subie^REfpiRSONAL1-3 ?HIS WRONG? [UNCLASSIFIED] tNon-Reccrd] WOuld welcome a conversation on this at some paint • plus a more gensral update —-Original Message— From; Jeremy Hsywood Sent: 28 October 200818:06 sSbjIdfpERSONAL - IS THIS WRONG? [UNCLASSIFIED] [Non-Recordl

4&aJ,Stom*X"MM*B or that the collateral that would qualify has not yet bean Identified and uaad dua to operational complexities.

wTJta: £I Aufflotant collateral ready to make full use of the facility. An altoinrtlv^ffiritoUat maJket at much higher rates {Includtng when that borrowing b Qovernment guarantesd). Tha BoE could temporarily wldan aliglble collateral still further, to include bank paper: senior debtand 2SnS^d53^~b« bank would be required to use pap«rotnerthanlt3 own, thus requiring ' -dual dellullfronithe subscribing and Issuing bank before the BoE ware exposed to loss.peBoE SSSraWfflSBBSsassaaBBa

exposure to the banking system as a whole Original Messaga-— From: Tucker, Paul Sent; 26 October 200811:11 W^^SS^for m*in 8UPper UNCLASSIFIED] [Non-RacordI

Yep In about an hour? 52

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TYPED-UP VERSION OF E-MAIL OF 26 OCTOBER 2008

*****Original Message***** From: Jeremy Heywood To: Tucker, Paul; Scholar, Tom Sent: Sun Oct 26 14:09:56 2008 Subject: LIBOR

************************************** This email has reached the Bank via the Internet or an external network **************************************

Comment from UBS (in confidence - pi protect) in case you have not had this directly. Keen to discuss this general issue with you next week unless LIBOR does start to fall fairly sharply

In summary Liber's decline is in train but it will be gradual. To speed it up a change in the guarantee fee (to bring it in line with the Dutch scheme) is called for. I am an advocate for speeding it up.

3 month Sterling Libor is the rate at which AA rated banks can borrow from one another. This is an unsecured borrowing rate. Libor is 'fixed' at 10:30am by averaging across quotes submitted by a panel of reporting banks. In the last 3 weeks the market has noticed that both Barclays and RBS have bid, after the 10:30 fixing, at levels up to 5bps above the fixing throughout the rest of the day. Brokers report that when the Bank of England cut rates on the 8th October by 50bps at 12 noon Barclays continued to bid for cash at the higher 10:30am level. The market has been speculating over what these two banks might be doing and have interpreted these actions as a deliberate signal that they are prepared to borrow unsecured at 6.00%.

There is no incentive for lenders to offer funds after 10:30 at or below Libor when they know two banks will continue to pay above Libor throughout the remainder for the day.

For example, on 23rd October 3 month Libor fixed at 6.005%. RBS continued to bid 6.050% through the remainder of the day.

Why might Barclays and RBS behave like this? We believe it is because Libor borrowing is cheaper than any alternative, including the CGS. Barclays could issue a 3 month CD within the CGS at Libor less 100, at best (maybe Libor less 50bps). UBS estimates Barclays CGS guarantee fee is 124 bps (12 month median CDS plus 50bps) which gives an all in CGS cost of Libor+24 at best, i.e. significantly more than Libor borrowing WHATEVER level Libor fixes at. Additionally, avoiding the CGS signals that banks using the Interbank market need no government assistance in borrowing.

Although Libor has fallen by 30bps since the announcement of the Guarantee Scheme, the size of the fall has been impeded by the implementation. We view the Libor market as dividing between 3 borrowers (HBOS, RBS and Barclays) and two lenders (Lloyds and HSBC). The borrowers do not have a cheaper alternative and lenders see no pressure to offer funds more cheaply. There is no immediately apparent mechanism to change this stand off. 54

If the CGS fee had not included the 50 bps it would have produced a different dynamic. For example, Barclays could have issued a 3 month CD at Libor less 100 plus a fee of 74bps giving an all in cost of Libor less 28. In this case Libor borrowing would have been the second best option and the lenders in the money market would have known this. In this example the level of Libor less 100bps would probably have fallen to where 3 month Treasury Bills are trading (4.00%) and therefore Libor would be 5.00% (or Bank Rate plus 50bps). Furthermore, additional Bank Rate cuts would push TBill yields lower and therefore Libor too, rather than having Libor stuck at 6.00%.

Another aspect of the current CGS fee structure is that reductions in CDS do not feed into lower fees while the September turmoil keeps the fee high. If the averaging window was more carefully chosen and the fee reduced as CDS fell it might be possible to create a virtuous downward cycle in Libor.

For example, the Dutch who had the benefit of time to study the UK scheme chose different fees for short and long term borrowing. For less that 1-year they charge 50bps flat and for longer than 1- year they charge median CDS plus 50bps but with the median window running from January 2007 to August 2008, excluding the September turmoil.

If the UK followed the Dutch example for the CDS window, the CGS fee would fall by between 20 and 80 bps but the all in fee would remain between 75bps and 110bps for the eight initial participants. Barclays fee would be 95bps, HBOS 75bps and RBS 85bps. While in theory this might give sub Libor funding in practice the benefit would be borderline.

Our suggestion is that it would be better to distinguish between short and long term use of the CGS and to charge a lower flat fee that ensures sub Libor funding at least until Libor reduces. We suggest initially following the Dutch example and using 50bps since this can easily be justified on competition grounds but would keep the fee under review as the market develops.

For latest news and information from Downing Street visit: http://www.numberlO.gov.uk

Help save paper - Do you need to print this email? 55

* RE: Manythanks for fitting in supper [UNCLASSIFIED] [Non-Record] Jeremy Heywood | Santt 25 October 2008 20:47 ..To! Tucker, Paul • did u text me earlier? when fs a good time to tatk> 56

Re: Might be scuttle butt - are u hearing this rumour? [UNCLASSIFIED] [Non-Record] Tucker, Paul Sent; 22 October ZOOB 22:30 To: jhaywoad

-— Original Message — From: Jeremy Heywootf To: Tucker, Paul MMmmAmMtk 1^^ lUNCUSSIFIEOI[Non.Record] o^toU we are v concerned that US rates are tumbling but we remain etuck!

—Original Message— From: Tucker, Paul L. _ Sent: 22 October ZOOS 22:17 auS flSftK b« cuttle butt - are u hearing this rurnaur? [UNCLASSIFIED] [Non-Record]

Institutions

— Original Message — From: Jeremy Haywood To: Tucker, Paul

From the money market tranches:

to. 57

L1B0R spreads [RESTRICTED] [Record] Jeremy Heywood SantJ 22 October 2008 10:08 To: Ticker, Paul any policy options wo should be considering? —Original Message— From: Tucker, Paul _ Sent: 21 October 2008 21:27 KLjKWhtnfc .or tt*g In aupper [UNCLASSIFIED] [Non-Record] Euro ones haven't fallen markedly either so far Dollar ones were significantly higher WSSSBSSt whole market. Hope that helps a bit Paul

— Original Massage — From: Jeremy Heywood ISSjfflSglnsupperlVNCUSSiFIED: [Non-Recorcfl Hope all wall Why are UK LIBOR spreads not failing as last as US? -—Original Messapa---- From: Tucker, Paul Sent: 13 October 2008 20:31 To: Jeremy Heywood Subject: Re: Manythanks forfitting I n supper That's quite something corning from where you sltl Let's hope It worksil

.— Original Message -- From; Jeremy Heywood To: Tucker, Paul Sent- Mon Oct 1319:14:07 2008 Subject: RE: Manythanks forfitting I n supper

This email has reached the Bank via the Internet or an external network 58

What a few days!

—••Origfnaf Message From; Tucker, Pauf Sent; 06 Jujif 200812i51 To; JereirnyfleywobT " Subject: Man/thanks for Fitting In suppsr

V good to ses you

Bast

Paul 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100 101 102 103 104 105 106 107 108 109 110 111 112 113 114 115 116 117 118 119 120 121 122 123 124 125 126 127 128 129 130 131 132 133 134 135 136 137 138

Suggestions for the Evolution of BBA LIBOR – A Discussion Paper.

Introduction

Since inception in 1985, BBA LIBOR has enjoyed an enviable reputation for accuracy. However, just as the credit crunch has led to stress in the markets, and the breakdown of longstanding correlations in the pricing of assets, it has also led to stress in the barometers of these markets.

This has led to much discussion of BBA LIBOR within the financial community, which has overflowed into commentary in the media, much of which is inflammatory, sensationalist and inaccurate.

The focus of this scrutiny has been on USD LIBOR, so this will also be the focus of this paper. The US quote is overwhelmingly the most widely used rate, as it is the reference rate for a vast derivatives industry, whose establishment was only possible due to the existence of BBA LIBOR as an objective market rate.

Caveat

This paper aims to discuss possible evolution of BBA LIBOR that might allow it to adapt to current market conditions and beyond. A wide range of stakeholders have contributed ideas to this paper including banks, brokers, derivative exchanges, hedge funds and (US) regulators However, when examining these proposals, we must bear in mind that BBA LIBOR has an unbroken back-history stretching back to 1985, and that radical change may devalue this history. We should also be keenly aware that BBA LIBOR now supports a swap market estimated at $350tn and a loan market estimated at $10tn, and any change must take into account the effect on these markets, which may extend to contracts stretching for decades into the future.

Although current discussions centre on USD LIBOR, the methodology of the rates should be fungible, therefore any change to the calculation of one currency should be considered in the wider context of the suite of 10 BBA LIBOR currency calculations.

Proposals

1. Extend the panel.

There is a perception amongst certain market participants that USD LIBOR is “too low”. The current panel includes the largest money-market banks in the UK, so it will certainly reflect the lowest funding levels. There is also concern amongst US and European users of the rates that the panel is too London-centric for a global fix.

There seems to be wide support amongst contributors and users that we should expand the panel to double its current size of 16 (but see 3, below)

Pros • Adding US and European members will mollify unhappy users and regulators in those markets. • Will lead to a more representative rate of general funding costs. 139

Cons • Historically, there has been an understanding that contributor banks should be BBA members. If we expand the panel this will no longer hold true. This may in fact be an advantage from a presentational point of view. • It may not be possible to find 32 banks that wish to quote Dollar LIBOR. It will almost certainly not be possible to double all the panels in size – for example there are not 16 banks in London active in the Danish Kroner market. • May lead to accusations of being led by criticism in the media.

2. Change the time of the quote

It is certainly observable that the cost of dollars changes throughout the day. There is a drop when the New York markets open, which is not captured by BBA LIBOR, which fixes at 11.00am London time. This is not an inaccuracy per se, but it does mean that BBA LIBOR is not the floor for dollar funding, which is one of the main uses for the data in the market. This could be addressed by either moving the fixing time to 4.00pm London time, or setting up parallel 11.00am and 4.00pm quotes.

Pros • Would ensure BBA LIBOR remains a measure of the lowest real world cost of USD, cementing its appeal as the basis for the US loan and derivative markets. • Removes a major part of the allure of any alternative fix.

Cons • A 4pm fix leave European banks with very limited time to square their books for all activity linked to a BBA rate in time for close of business and settle via CLS. • Multiple fixes may lead to confusion in the market.

3. Move to a median rather than a trimmed mean

Currently rates are created by ranking the contributors, discarding the top and bottom quartiles and then averaging the 2 central quartiles. It is therefore difficult to influence the rates as any submitted rate that is far enough away from the average to move the fixing materially will be discarded. Analysis indicates that the effect of moving to a median is less than 1 basis point in major currencies and less than 2 in smaller currencies.

Pros • Whilst the current calculation is resistant to manipulation, a median is even more secure. It is not possible to move a median by inflating or deflating a contribution and any effort to influence the median would need a majority of the panel to be complicit. • Derivative exchanges are keen we move to this methodology.

Cons • A true median would require us to have an odd number of contributors. • Any alteration of methodology has implications for the back-history as an accurate analysis tool. The effect here should be minimal, however.

140

4. Anonymise the rates

It has been suggested in certain research reports that contributors may be understating their true funding costs or exhibiting “pack behaviour” as in the current strained market, indicating funding costs out of line with the market invites scrutiny and speculation in the media.

Pros • Making contributions to the rate anonymous solves this problem as banks may quote their “true” rates. • Removes immediately the problem of accusations from market participants that banks quote one rate and deal at another.

Cons • Transparency of rates is a fundament of the BBA LIBOR rate setting process that ensures accountability. • Transparency and accountability are unique selling points compared to other market rates. Moving to such a methodology is retrograde and imitative of rivals

5. Alter the definition There is confusion in the market, and even amongst contributors, about what BBA LIBOR is for, and how it should be constructed. Whatever the outcome on the debate on the definition of BBA LIBOR, the resulting definition must be made very clear to contributors, users and commentators.

Currently the definition is the rate at which an individual contributor panel bank could borrow funds, were it to do so by asking for and then accepting inter-bank offers in reasonable market size, just prior to 1100

5(a). Loosen the definition of what is “offered” Part of the misunderstanding of BBA LIBOR is what constitutes an “inter-bank offer”. A change could be made to the rate at which a bank can obtain unsecured funds.

Pros • Allows the rate to reflect true lowest cost of funding.

Cons • Would lead to an enormous spread between the top and bottom of the quote – possibly 100 basis points at the moment. • Very hard to verify as the lowest cost of funding may well be provided by an unseen bi- lateral arrangement.

5(b). Loosen the definition of who is offered funds The definition of BBA LIBOR until 1998 was “the rate at which one prime bank would lend to another”. This is currently used by EURIBOR and the proposed NYFR. BBA LIBOR could revert to this.

Pros • Removes immediately the problem of accusations from market participants that banks quote one rate and deal at another as banks would not quote their own rate. • Arguably the current market standard definition.

Cons 141 4

• Moving to such a methodology might be portrayed as retrograde and imitative of rivals in the media. • Difficult to define “prime bank” or create a well understood alternative.

5(c). Define “Reasonable Market Size” The definition of BBA LIBOR intentionally leaves this undefined, on the grounds that it is a constantly moving target depending on the prevailing market conditions, and this is well understood by the market. That said, a concrete figure could be applied for each currency and updated as necessary.

Pros • Removes another small area of uncertainty from the rates thus improving - if only minimally – transparency and accountability

Cons

• Would be complex operationally. “Reasonable market size” might change weekly in the prevailing conditions. The process for agreeing and then disseminating the definition would be time consuming for contributors.

Next Steps

Whilst the BBA LIBOR rates operate under the sole guidance of the Foreign Exchange and Money Markets Committee, usage of the rates is global.

The BBA recommends that the FX &MM decides which, if any, of these proposals should be considered, and then these should be made the subject of a short consultation run by the BBA and open to any interested parties. The results of these would be presented to the Committee for their final decision, with an analysis of their impact and how they might be implemented.

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Mr Andrew Tyrie MP Chairman, Treasury Select Committee 7 Millbank House of Commons London SW1P 3JA

2 August 2012

Dear Chairman

I am writing in response to your letter of 18 July 2012 in connection with the Treasury Select Committee's inquiry.

My responses to each of your questions are as follows:

1. You ask me whether I discussed with Mr Diamond his conversation with Mr Tucker or his subsequent file note of that conversation. I do recall discussing the critical subject of Barclays funding with Mr Diamond on a number of occasions during 2008, in which context the views of "Whitehall" were sometimes referenced, but, other than responding to Mr Diamond in the way I describe in paragraph numbered 4 below, I do not recall speaking with him about his conversation with Mr Tucker or his subsequent file note.

2. To the best of my recollection and belief, I did not discuss Mr Diamond's conversation with Mr Tucker or his file note with Mr del Missier.

3. Similarly, I did not discuss Mr Diamond's conversation with Mr Tucker or his file note with Mr Agius, or any other senior executive or non-executive director.

4. As to whether I replied to Mr Diamond's file note or took any consequential action, I emailed Mr Diamond on 3 November 2008 in response to his file note of 30 October 2008 saying: "Bob, We should discuss." I believe this was in anticipation of a working dinner I was due to attend on 3 November with Lord Turner and Mr Sants, to which I referred in my letter to you of 16 July 2012. I do not recall receiving a reply from Mr Diamond or taking any specific action beyond what I described in that letter to you of 16 July.

Yours sincerely,

John Varley