The men, aged 33, 41 and 47, were detained by the City of London police on the orders of the Serious Fraud Office in an early morning raid on three properties in Essex and Surrey yesterday.
They were taken to a police station in London where they were still being questioned by police and SFO investigators last night.
No charges have been brought.
One of the men arrested is understood to be Thomas Hayes, 33, a former UBS yen trader who worked for the bank in Tokyo between 2006 and 2009.
Hayes moved to the yen trading desk at Citi in Tokyo in 2010 but left the business after less than ten months.
Citi is understood to have reported him to regulatory authorities in 2010 following his departure but no further action was taken.
Both Citi and UBS declined to comment. Hayes could not be reached.
The other two men are believed to have worked for interdealer broker RP Martin, according to a source.
An RP Martin spokesman said the business itself was not under investigation and added the firm never commented on employee matters.
The Japanese Financial Services Authority (JFSA), the country’s financial watchdog, first flagged up certain yen UBS and Citi Libor submissions in a December 2011 censure.
It subsequently filed an administrative action against Citi Global Markets Japan and suspended it from trading derivatives tied to Libor from 10 to 23 January 2012. It said that there had been “...inappropriate approaches, such as requesting to change the Yen-Libor rates”.
The JFSA also filed a similar action against UBS Securities Japan and suspended it from trading between 10 and 16 January 2012. None of the traders thought to be involved have been charged with any wrongdoing.
The SFO announced it was investigating alleged Libor manipulation at the start of July, following the conclusion of an investigation by the Financial Services Authority.
At the end of July it announced that there were sufficient grounds to bring criminal action in relation to the alleged manipulation of Libor.
Libor, an acronym for the London Interbank Offered Rate, is a key interest rate used in the City and the wider financial system.
It measures the rates banks will lend to each other and is calculated every day as an average of the rates submitted by a panel of banks.
Barclays was hit with a £59.5m fine by the Financial Services Authority after breaking cover and confessing to attempting to manipulate the rate between 2005 and 2009.
Its chairman Marcus Agius and chief executive Bob Diamond subsequently resigned over the scandal. Yesterday’s arrests are understood to be unconnected to the Barclays case.
The SFO arrests could prove the tip of the iceberg in the UK’s probe into Libor, with regulators in other jurisdictions such as the Canadian Competition Bureau and US regulators also examining the case.
Libor-setting is expected to be reformed under proposals by incoming City regulator Martin Wheatley.