The Commodity Futures Trading Commission (CFTC) has filed an Order Request and settled settlement costs with ICAP Capital Markets LLC (ICAP), now known as Intercapital Capital Markets LLC (ICAP), for, through and through certain brokers, assisting and inciting countless attempts by several of its bank customers manipulate the ISDAFIX benchmark, a global benchmark referenced in a range of interest rate products and for which ICAP has to pay a fine of $ 50 million.
The CFTC Order notes that for more than five years, starting in at least January 2007 and up to and including December 2012 (the relevant period), ICAP swaps were regularly hired by traders at bank customers to help manipulate the US Dollar International Swaps and Derivatives Association Fix (USD ISDAFIX) for the derivative positions of their bank customers, including positions in cash-settled options on interest rate swaps.
James McDonald, CFTC Director of Enforcement, said:
When intermediaries in our markets help others to commit mistakes, they are held accountable. This issue is set in a series of CFTC actions that demonstrate the Commission's relentless commitment to continue to rely on the integrity of critical financial benchmarks. There is no room for manipulation of our markets and we will continue to pursue those who try to manipulate and everyone who chooses to help them.
The Order explains that during the relevant period ICAP initiated the setting of USD ISDAFIX each day by recording and recording swap rates and spreads based on trading activities at or around 11:00 AM Eastern Time on the ICAP trading platform for swap spreads and on an affiliated company. platform for US government bonds. This was known as the & # 39; print & # 39 ;. After the & # 39; print & # 39; and a filing procedure carried out by a panel of contributing banks, ISDAFIX quotes and spreads were published daily during the relevant period and they had to indicate the average mid-market risk. at a specific time of the day for the fixed leg of a standard fixed-for-variable interest rate swap. USD ISDAFIX is issued in various currencies and published for different maturities of US dollar-denominated swaps. The USD ISDAFIX rate of 11:00 was used for cash settlement of options on interest rate swaps or swaptions and as a valuation instrument for certain other interest rate products.
According to the Order, traders at various banks often tried to manipulate USD ISDAFIX by offering, offering and executing transactions in targeted interest rate products, including swap spreads and US Treasuries at or near the critical period of 11:00 am on the electronic screen for interest rate swap known as the "19901 screen" and thereby increases or decreases the "print" of ICAP and influences the eventually published USD ISDAFIX.
Early in the relevant period, ICAP brokers and their banktrader customers sometimes explicitly discussed the intention of traders to manipulate USD ISDAFIX. For example, in 2007 a broker told a Bank A trader: "If you want to influence it at eleven, tell me how you want to influence it, then we'll try to influence it that way." In November 2008 told another trader from the same bank to the same broker: "I want a low ISDAFIX in 2s" and "I do not want to burn", which means that he would rather not carry out transactions if possible he just wanted to influence the rate. In the course of time, an understanding arose between many of the brokers and their banktrader customers and their communication became less explicit. By April 2011, a third trader at that bank only had to offer exchange rate spreads at the moments before 11 AM, and the same broker immediately understood the intent with the question: "Do you want the screen up? Is that the idea?" "Yes, "the merchant replied.
The Order concludes that ICAP brokers would not only assist traders in their manipulative attempts, but would on many occasions suggest ways to manipulate USD ISDAFIX more effectively. In May 2008, another ICAP broker explained to a trader at a different bank how the manipulation of the USD ISDAFIX at 11:00 could best be done:
The easiest way to achieve the screen shot is by hitting the bid and keeping the hit price, the only problem is what if someone has the counterparty [sic] interest and is willing to spend a yard [$1 billion notional] to push it against you. You saw 2 weeks ago [Bank A] moved the bonds a whole point and did 1.2 yards to get the print. Sometimes banks are willing to spend everything that is needed to get the print. . . there were cases where [Bank B] will do 2 yards of 5s or 10s at 11 o'clock [sic] to get his print. . . NOT ME [sic] TO THINK [Bank B] KNOW WHAT THEY DO AT 11, THAT [sic] DO NOT BE THEIR MOST IMPORTANT CARE [sic] THE PRINT THAT IS APPLICABLE.
The Order offers comparable examples of multiple banks and swaps in the medium term at ICAP. The brokerage by ICAP brokers of the manipulative trading of their customer banks allowed the brokers to maintain good relations with the bank traders and to earn millions of dollars in broker commissions.
The role of ICAP in relation to the publication of reference interest rates and the collection of data for the ISDAFIX system for setting the reference interest rate ended in 2014. As part of its offer of settlement that the Commission accepted, ICAP represented its high-profile activities, including the swaps desks involved in the ISDAFIX interest rate fixing process were sold to another company in December 2016 and steps were taken prior to that sale to make reasonable efforts to ensure the integrity of USD trade in interest rate swaps. to ensure spreads that would be published in the benchmark and / or would be used in connection with a benchmarking process.
The Order states that, by accepting ICAP's offer, the Commission recognizes the cooperation of ICAP with the Division of Enforcement investigation in this case. Accordingly, the civil fine imposed on ICAP reflects the level of cooperation that ICAP has provided during the course of the investigation.