By Douwe Miedema
Jan 27 (Reuters) - Swaps broker ICAP will give up its role in establishing a widely used benchmark for derivatives, two sources familiar with the situation told Reuters, after U.S. and UK regulators started investigating the process.
The International Swaps and Derivatives Association (ISDA) is expected to announce the change on Monday, in another blow for UK interdealer broker ICAP after its involvement in the Libor rate-rigging scandal.
The organization's ISDAfix benchmark is an important reference point underlying contracts in the $630 trillion derivatives market, and ICAP collects data for the U.S. dollar-denominated part of it.
But in April last year, ISDA said it had been subpoenaed by the U.S. derivatives regulator - the Commodity Futures Trading Commission (CFTC) - over the benchmark, and ICAP has said it is involved in that inquiry. Britain's Financial Conduct Authority is also investigating the benchmark.
ICAP, like rivals Tullett Prebon and BGC Partners , makes money by matching buyers and sellers of bonds, swaps and currencies.
The scandal surrounding Libor, which measures rates at which banks lend to each other, exposed widespread attempts to manipulate survey-based benchmarks. Banks such as UBS, Barclays and RBS have paid billions in fines over Libor.
Last week, Reuters reported that global regulators have now also started looking at reforming benchmarks used in the largely unregulated currency market.
The ISDAfix rates are based on a survey of a panel of banks for a range of different currencies. Until now, ICAP collected banks' contributions for the U.S. dollar rate, and sent them on to Thomson Reuters Corp, which calculates the rate.
ICAP has been doing this for more than 15 years, but the process will now change, and Thomson Reuters will start collecting data for the U.S. dollar rates just as it does for the other currencies, the first source said.
"We appreciate ISDA's interest in having a consistent polling process across each of the relevant currencies and fixings," ICAP said in a statement.
Thomson Reuters made no immediate comment.
ICAP had been providing "snapshots" using transaction-based information from its BrokerTec platform in addition to information from recent deals, the second source said, but the process would now return purely to a poll of participating banks.
There was a risk this could lead to inconsistencies, due to the way the dollar-denominated swaps market worked, the person said.
An ICAP spokeswoman said the company earned some data revenues from its role in setting ISDAfix, but the changes to the system would not have a significant impact on the company.
ICAP shares were down 2.4 percent at 405 pence at 1402 GMT, versus a 0.6 percent drop in the FTSE 250.
Analysts said the ISDAfix reform served as a reminder of the ongoing investigation, as well as the structural reform being carried out in over-the-counter markets, which have scope to disrupt the broker market.
In the United States, trading of interest rate swaps and credit default swaps through electronic platforms called Swap Execution Facilities (SEFs) will become mandatory in February.
Monday's wider sell-off of risky assets triggered by concerns over emerging markets and recent signs that investment banks' trading revenues remain weak could also be responsible for ICAP's share price fall, analysts said.
"Over the fourth quarter we haven't seen an improvement in bond trading, so there's maybe a little bit of realisation of that reality following a period of over-exuberance in terms of anticipation," Shore Capital analyst Greenwood said.
ICAP is scheduled to give a trading update on Feb. 5.
ICAP was fined $87 million by British and U.S. authorities in September over the role of its brokers in Libor-rigging. Criminal charges were also filed against three of its former employees.