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Speaking publicly on the Libor scandal Tuesday, Federal Reserve chairman Ben Bernanke pushed back against suggestions that the Fed should have done more when it learned of potential problems with the benchmark rate.YURI GRIPAS/Reuters

Canada's Competition Bureau is being accused of invading the sovereignty of the United Kingdom as it attempts to investigate one of Britain's biggest banks as part of an international probe into the rigging of key interest rates.

As part of the investigation into the fixing of the benchmark interest rate Libor, which stands for the London interbank offered rate, the Competition Bureau has demanded documents from six foreign banks operating in Canada.

The rate, which is set by a group of 13 financial institutions based on their funding costs, influences the pricing of trillions of dollars of financial products around the world, from credit cards and mortgages to corporate lending and bonds.

However, Royal Bank of Scotland has fired a shot across the Competition Bureau's bow, saying the demands for trading data and documents from England through its offices in Canada constitute an "invasion of the sovereignty of the United Kingdom." RBS, one of the largest U.K. banks, also argues that Canadian authorities are attempting "to do indirectly what the Court can not do directly" by using RBS's Canadian offices to investigate the parent company overseas.

The war of words is contained in court documents filed with the Ontario Superior Court of Justice over the past year.

The documents highlight the complexity of the international investigation which crosses numerous borders, making it difficult for a regulator in one country to demand information from another. Indeed, when the federal Competition Bureau was brought into the matter in early 2011, it was to assist British regulators in finding out whether the Libor rate was manipulated by banks between 2008 and 2010.

British regulators are probing at least 16 banks involved in setting Libor during that time, including Canada's largest bank, Royal Bank of Canada. RBC has issued a statement saying it does not believe it ran afoul of British banking rules in its reporting to the Libor process, and has also said it is not being investigated by the Competition Bureau.

But British regulators have looked to the Competition Bureau for help in gathering evidence on foreign banks. As part of that request, the Bureau has filed formal requests for documentation on rate-setting from six international banks, including the Canadian operations of RBS, HSBC, Deutsche Bank, JPMorgan, Citibank and ICAP Capital.

The broader international probe into rigging of the Libor has snared some of the world's biggest banks including UBS and Barclays Bank PLC. UBS brought the issue to light when it announced early this year that it had settled with regulators in exchange for immunity from prosecution. And several weeks ago, Barclays agreed to pay $453-million in fines to settle similar allegations, and announced the resignation of its CEO Bob Diamond, and its chief operating officer, Canadian-born Jerry del Missier.

According to the documents filed in Ontario, the first priority on the Competition Bureau's mind was evidence preservation, fearing that the probe could get hung up if key documents could not be produced quickly.

"My understanding … is that there are parallel international investigations concerning the matter," Robert Morin, the federal prosecutor representing the Bureau, said in a May, 2011, letter to the Ontario Superior Court, in which Canadian authorities sought to go after documents held by foreign banks. "In light of the co-ordination of these international investigations and so as to preserve evidence, the Bureau would like to exercise the production orders as soon as possible."

The complexities of the international probe have also been a problem for U.S. authorities concerned with the rigging of Libor.

Speaking publicly on the Libor scandal Tuesday, Federal Reserve chairman Ben Bernanke pushed back against suggestions that the Fed should have done more when it learned of potential problems with the benchmark rate.

Libor is set by the British Banking Association, a group over which the Fed has no authority. "Our direct ability to influence that is limited," Mr. Bernanke said. Though three of the 16 banks that contributed to the Libor process over the period in question are American, Mr. Bernanke said he did not know if those institutions were guilty of abuse.

Even though the U.S. economy is visibly faltering, the first questions Mr. Bernanke received at an appearance Tuesday at the Senate Banking Committee were about Libor.

"What did you know? When did you know it? What did you do about it?" committee chairman Tim Johnson, a Democrat from South Dakota, asked in rapid succession.

Mr. Bernanke told lawmakers that he first learned about the potential issues with the Libor setting from newspaper reports. Mr. Bernanke called the Federal Reserve Bank of New York's response to those reports quick and "substantial," and said that the information the New York Fed gathered "led to investigations." Authorities in Washington, including the Treasury, were briefed formally by the New York Fed in early May of 2008.

"The disclosures are troubling and have the effect of undermining confidence in financial markets," he said.

Mr. Bernanke also noted that participants were under no obligation to follow Libor. "It is a freely chosen rate." When asked if he should have made sure that market participants knew about the Fed's concerns, Mr. Bernanke said he doubted most investors needed him to tell them that Libor was suspect. "I'm not sure I would agree that this was something unknown," he said. "The financial press was full of stories about it," he said. "There was a good bit of knowledge, at least among sophisticated investors, that there was a problem."

And while Mr. Bernanke said he lacks confidence in the efficacy of Libor, he expressed skepticism that it would disappear as hundreds of trillions of dollars in contracts are linked to the rate. Mr. Bernanke compared Libor to the QWERTY keyboard, saying that while it it's not the most efficient, everyone is used to it, so it's unlikely to change.

Editor's Note: There are 13 financial institutions that contribute to the yen-based Libor interest rate. Incorrect information appeared in a story on Wednesday.

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