Former Deutsche Bank Trader Describes Difficulties in Tokyo\'s Rates Market

TOKYO - One particularly tough trading day in the summer of 2007, Eddy Takata, then a derivatives trader with Deutsche Bank in Tokyo, threw up his arms in frustration and shouted, “Manipulation!”

A major interest rate had again moved in favor of a rival trader at UBS, a relative newcomer to Tokyo named Tom Hayes. The handful of traders battling it out in the Tokyo market had started to sense Mr. Hayes was rewarded a little too often for his oversize risks, according to a book by Mr. Tanaka published on Tuesday.

Mr. Hayes is now a central figure in a global investigation into rate manipulation. American authorities have accused him of colluding with rivals as part of a vast conspiracy to report falserates to bolster earnings.

The broad investigation has ensnared more than a dozen banks, prompting two Japanese units of UBS and the Royal Bank of Scotland to plead guilty as part of larger settlements.

The investigation focuses on benchmarks like the London interbank offered rate, or Libor, and the Tokyo interbank offered rate, or Tibor, which help determine the borrowing costs for trillions of dollars of mortgages, corporate loans and other financial products.

In late 2011, Japanese financial regulators also penalized the local units of UBS and Citigroup, ordering the banks to temporarily suspend some derivatives trading after finding that their employees had attempted to influence Tibor.

In his book, whose title loosely translates to “Market Manipulation and Deceit,” Mr. Takata, who traded derivatives in Tokyo for 18 years, paints a picture of a fast-moving, high-stakes, ego-fueled market controlled by a handful of traders. The champagne flowed when profit was strong, he said, but heads rolled over a single miscalculation. He also describes the power relationships between high-rolling traders and their colleagues who set the rates.

Mr. Takata says he frequently found himself on the opposite end of Mr. Hayes’s trading in a market where the players operated on a first-name basis. He said many of Mr. Hayes’s trades tended to come in the evenings in Tokyo, or between 8 a.m. and 9 a.m. in London, shortly before Libor rates were st at 11 a.m. He appeared to prefer high-stakes trades that would allow him to immediately lock in profit, but which could also result in heavy losses, based on how Libor moved that day, Mr. Takata said.

“Normally, that sort of trade is out of the question,” Mr. Takata said. “There is no upside for the trader. You pay broker fees for a position that really could go either way. But Tom frequently engaged in these trades. Inexplicably, Libor always moved in Tom’s favor.”

Despite being a standout, aggressive trader in the market, Mr. Hayes was conspicuously absent from the gatherings and parties frequented by the city’s traders and brokers, Mr. Takata said. He met Mr. Hayes just once in person, in 2007, after a particularly big interest-swap trade.

Mr. Hayes’s colleagues on UBS’s yen interest-swap desk invited Mr. Takata to dinner at a restaurant in Akasaka, an upmarket entertainment area in Tokyo, according to his book. Mr. Hayes turned up carrying a thick economics tex! tbook und! er his arm, and hardly joined in the conversation, Mr. Takata recalled.

Contrary to his bold trades, Mr. Hayes came across as a “highly educated, quiet Englishman,” Mr. Takata said. “Our conversation didn’t really take off.”

Rate trading soon proved to be troublesome for Mr. Takata. In late 2007, Mr. Takata lost his job over mounting losses linked to Tibor. Mr. Takata says that Euroyen Tibor futures rose inexplicably in the last two weeks of 2007, unnatural movements he had never encountered in 18 years of trading.

Ultimately, Mr. Takata said he lost almost 5 billion yen ($53.5 million) on trades linked to Euroyen Tibor, resulting in an internal investigation at Deutsche Bank. He left the company in March 2008, but said he had not faced any disciplinary action or charges over his trading and had not been questioned in relation to rate investigations. Deutsche Bank confirmed that Mr. Takata had worked as a trader in its Tokyo office between 2006 and 2008, but declined to comment frther on his work.

In March 2009, a year after his departure from Deutsche Bank, Mr. Takata threw one last party for traders and brokers at the now-defunct Club 57 in Tokyo’s Roppongi district. He dug up the name card that Mr. Hayes had given him at the Akasaka restaurant, and sent him an invitation, Mr. Takata said. Mr. Hayes never showed up.