FCA investigates alleged gilt price manipulation at Lloyds

Bank assisting regulator as it looks into claims trader fiddled UK government debt

Antonio Horta-Osorio, the Lloyds chief executive, had been seen as performing well (Getty Images)

Lloyds Banking Group is embroiled in a new investigation by UK regulators into potential manipulation of government debt prices by one of its traders.

The Financial Conduct Authority is in the early stages of studying whether a Lloyds trader tried to fiddle the price of UK government bonds to arbitrage the market – pushing prices the prices of gilts down when buying and driving them up selling to investors.

Lloyds is assisting with the investigation, which is understood to focus on the trader involved rather than the bank, a source said.

The FCA declined to comment. Lloyds said it did not comment on speculation.

The investigation will prove doubly embarrassing for the bank given it has been part-owned by taxpayers since 2008. The Government is set to kick off a £2bn share sale to retail investors later this year to dispose of its remaining minority stake.

It will also come as a blow to Lloyds chief executive Antonio Horta-Osorio, who has been praised for his solid stewardship of the bank while under government control.

The Government part-nationalised Lloyds in 2008 during the credit crunch, taking a 41 per cent stake in the bank before gradually beginning to sell it down.

The Chancellor, George Osborne, has hailed Lloyds as a mark of success in bailing out the banks during the crisis.

The case coincides with a broader look into potential manipulation of the bond market by global regulators.

The US Department of Justice is reported to be examining possible manipulation of the government debt and is focusing on London-based traders working before 2014. US prosecutors are said to have requested online chat room transcripts from a series of banks.

The gilt probe, first reported by the Wall Street Journal, comes in the wake of a series of price manipulation scandals by bank traders. The Libor scandal, which saw traders collude to fix the bank lending rate, led to $9bn (£6.1m) worth of penalties for banks – including UK lenders HSBC, Lloyds, RBS and Barclays – and the jailing of the former UBS trader Tom Hayes for 11 years.

This was followed by revelations that traders also rigged foreign exchange markets. Regulators served up more fines against banks over the cases while civil cases are still pending.

The scandals led to a backlash against the banking industry by the public which persists to this day.

The UK gilt market is worth about £1.5 trillion. Gilts are bonds issued by the UK government to finance the running of the country.

The investigation into the Lloyds trader comes in the wake of another FCA inquiry in 2014 into a trader accused of possible manipulation of the gilt market. A former Credit Suisse trader was banned by the FCA and fined more than £660,000 over allegations he manipulated the government bond market during the Bank of England’s quantitative easing in 2011.

The trader amassed a huge position in a particular gilt – worth about 92 per cent of the gilt’s turnover on the day - to try to drive up the prices ahead of a move by the central bank to buy them back. The central bank subsequently cancelled the buy back after prices rose too high.