Transcript: The hack that halted the US Treasury market

This is an audio transcript of the FT News Briefing podcast episode: ‘The hack that halted the US Treasury market’

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Marc Filippino
Good morning from the Financial Times. Today is Monday, November 13th, and this is your FT News Briefing.

It doesn’t seem that long ago that oil prices were close to hitting triple digits. But that’s all changed. And dealmaking in the UK has hit the regulator who oversees it. Plus, a massive hack hit the US Treasury market last week.

Kate Duguid
You know, people have been worried about the Treasury market for a long time, but cyber attacks were not on the top of people’s minds when it came to the Treasury market.

Marc Filippino
I’m Marc Filippino and here’s the news you need to start your day.

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A cyber attack hit China’s largest bank last week. The hack disrupted the financial services arm of the Industrial and Commercial Bank of China, the ICBC, for short. In the process, it screwed up trading in the US Treasury market. And now people are wondering — how exposed is the global financial system? Here to talk to us about it is the FT’s capital markets correspondent Kate Duguid. Hi, Kate.

Kate Duguid
Hey.

Marc Filippino
All right. So what do we know about the extent of the attack? How disruptive has it been? Who’s behind it? Things like that.

Kate Duguid
Sure. Here’s what we know. There was a ransomware attack on the financial services arm of China’s largest bank, ICBC. And that attack forced people to reroute Treasury trades to other banks. ICBC plays a very specific role within the Treasury market, so they act as a clearing house. So they finalise trades. They collect margin payments. Basically, they validate and finalise transactions within the Treasury market, amongst other banks. There are a bunch of other banks that play this role as well. What we know is that clients of ICBC had to send those trades that they were doing elsewhere. Things got back to speed pretty quickly, but people in the market were spooked, right? Like, the Treasury market is the biggest market in the world. It’s the most liquid. It underlies asset prices around the world. So any small disruption in the Treasury market is going to have a big impact.

Marc Filippino
Yes. So what do we know about what happened to US Treasuries as a result of this hack, Kate?

Kate Duguid
We do know that there was a 30-year auction that was happening in the midst of the day, and that auction went really, really poorly.

Marc Filippino
Meaning that people didn’t buy as many Treasury bonds as maybe had hoped.

Kate Duguid
Yeah, so . . . Exactly. So a lot of people who normally buy Treasury bonds didn’t show up to buy them. It’s kind of unclear why that happened. It is hard to sort of prove causality, but it may be that what happened is that big Treasury traders who were participating in this market were a little bit thrown off. Right? There was maybe a bit of a fog of war, where people were hanging back from making big trades because they weren’t really sure what was going on.

Marc Filippino
How often do cyber attacks like this hit the financial sector?

Kate Duguid
So the Treasury market has not been hit by one of these in a while. But we do know that the software that was used in this hack was LockBit 3.0. LockBit is a ransomware group but they also create software. Nobody has claimed responsibility for the attack, but that ransomware gang also claimed responsibility for a cyber attack earlier this year on Ion Group, which is this UK software company, and their products are used by financial institutions, by banks, and that impacted the derivatives market.

Marc Filippino
So what then do hacks like the one ICBC experienced last week, what do they tell us about the security and the stability of global markets as a whole?

Kate Duguid
You know, people have been worried about the Treasury market and the stability of the Treasury market for a long time. There have been all sorts of structural issues that have emerged as the Treasury market has grown. But cyber attacks were not on the top of people’s minds when it came to the Treasury market. There are a lot of other issues that people would have talked about first, but this gets added to the list of things to worry about within the Treasury market. It is a concern.

Marc Filippino
Kate Duguid covers US capital markets for the FT. Thanks, Kate.

Kate Duguid
Thank you.

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Marc Filippino
Now, we’ve talked a lot on this show about how mergers and acquisitions are slowing down because of higher interest rates. Well, the drought in deals now has a new unexpected victim — the UK’s M&A watchdog. The FT crunched the numbers and found that the Takeover Panel is reporting its first deficit in almost a decade. It funds itself through the fees it charges on transactions and filing. But with the downturn in dealmaking, the Takeover Panel finds itself in a hole nearly £4mn deep. It doesn’t help that the panel reduced some of its fees, which is shrinking its income even more. So let’s go back just to put the state of dealmaking into context. The London Stock Exchange Group found that deals involving a UK company fell 45 per cent from the start of 2023 through September, year on year. That is the lowest figure for that period since 2009.

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When the Israel-Hamas war started in early October, oil prices spiked, which is what you’d expect out of a conflict in the Middle East. But now oil prices are back to their lowest levels since July. Brent crude is around $80 a barrel. Here to explain is Myles McCormick. He covers energy for the FT. Hey, Myles. 

Myles McCormick
Hey, great to be on.

Marc Filippino
So what’s going on here, Myles?

Myles McCormick
Yes. So it’s important to put this in a bit of context. So what you had over the last few months, even before Israel-Hamas, was oil prices climbing all throughout the late summer and fall on a kind of a bullish hope that demand was rising. There’d been an extension of a supply cut by Saudi Arabia and its allies in the middle of the summer, and it was all very bullish for oil prices. And then you had the conflict break out in the Middle East. And while Israel isn’t an oil producer of any significance itself, there was a fear that the conflict could expand, draw in other countries in the Arab world, perhaps Iran, perhaps Saudi Arabia, and cause huge supply disruption. So oil took another jump then. But that’s all changed now. I think the market has decided that that was kind of overblown, overstated. Certainly the conversation is a lot more bearish now than it was just a few weeks ago.

Marc Filippino
OK. So the fact that the Israel-Hamas war hasn’t escalated into a bigger regional conflict, that’s taken pressure off oil prices. But it sounds like it wasn’t the only reason.

Myles McCormick
Yeah, well, more than that, what’s dragging down prices, according to analysts that I’ve spoken to, is kind of a reassessment of the global economic picture. Coming into the fall and the autumn, there was this view that demand is robust, supply was tight, oil supplies were going to be limited, pushing up prices. But there’s been a bit of a reassessment of that now with negative economic data. So it looks like demand is weaker than was anticipated. That economic weakness is leading to some fears, some doubts about the strength of global economies going forward, the potential perhaps for recession to come into the picture again. And that obviously would be hugely bearish for oil markets because as economies become weaker, demand for oil does as well.

Marc Filippino
Now, what are analysts telling you about what they’re expecting for oil prices, going forward?

Myles McCormick
Yeah. Analysts always hate to be kind of reading the tea leaves as to what is gonna happen going forward. I mean, just a few weeks ago, a lot of analysts were predicting that $100 oil was on the horizon and indeed, oil pushed up to about $98 a barrel before dropping back. So certainly the conversation around imminent triple-digit prices has vanished. And there is kind of a feeling that this weakness might continue.

Marc Filippino
Myles McCormick covers energy for the FT. Thanks, Myles.

Myles McCormick
Thanks very much.

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Marc Filippino
Before we go, Iceland declared a state of emergency yesterday after thousands of earthquakes rocked the country. Experts and government officials are now worried about a volcanic eruption. Four thousand people were evacuated from a town in the south-west of Iceland. The island is pretty used to dealing with volcanic eruptions. Ash clouds back in 2010 closed European airspace for almost a week. And back in 1973, an eruption destroyed several hundred homes.

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You can read more on all of these stories at FT.com for free when you click the links in our show notes. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.

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