CFTC settles fourth major case in interest rate swap manipulation investigation.
U.S. regulator CFTC fined the Royal Bank of Scotland (RBS) $85 million for its alleged role in manipulating the ISDAfix benchmark, which is tied to the $311 trillion interest rate swaps market.
The civil penalty against the U.K. state lender is the fourth settlement the regulator has struck in its four-year-long investigation. All of the penalties have been connected to attempted manipulation, because the regulator has not shown that banks and brokers actually changed the rate through their trading.
To date, the CFTC’s tally is a hefty $570 million with Citigroup having shelled out a $250 million fine, Barclays, $115 million, and Goldman Sachs, $120 million.
Although the ISDAfix benchmark is often considered esoteric, it plays an important role in global financial markets. Before 11a.m. in New York, each bank provides the rate at which it would buy and sell a benchmark swap with a notional value of $50 million. This helps determine the value of interest-rate swaps, securitized bonds and options on swap contracts, which are commonly used by banks, companies and fund managers to hedge potential rate moves.
The CFTC alleges that RBS traders located in Stamford, Conn., acted through an unidentified derivatives broker, whose job it was to poll market participants daily at 11 a.m. ET for the re-pricing of the benchmark. The regulator said the bank’s aim was to benefit its own trading positions whose values were set off the rate.
The regulator, which sifted through numerous emails and audio recordings, highlighted one email from an RBS trader, labelled “Swaps Trader 1,” who joked that charges relating to hedge fund Amaranth’s trades in the energy market were charges for rigging ISDAFIX.
The CFTC said, “An RBS swap trader converted a news story about the lawsuit into a prescient ‘joke’ where RBS took the place of Amaranth as the manipulator sued by the government.”
RBS neither admitted to nor denied the allegations. However, in a statement, Ross McEwan, chief executive for RBS, said, “This is an example of past misconduct that has no place at RBS and we strongly condemn these actions,” said
McEwan adds that “these findings make for uncomfortable reading and we have already taken significant steps to make sure this kind of behaviour cannot happen again. The culture and structure of RBS has changed dramatically in recent years. I’m pleased we can put this issue behind us and concentrate on the important job of building a bank that is fully focused on the best interests of its customers.”
Since Donald Trump took over the reins of the U.S. presidency there has been a rush of agreements between U.S. regulatory authorities and financial services firms as key regulatory officials from the Obama administration exit and hand over responsibility to Trump’s appointees.
For example, earlier this month, Aitan Goelman, the director of the CFTC’s enforcement unit, stood down after leading the agency’s settlements with the banks over the past three years.
Market participants though should not expect the probes, fines and penalties to necessarily ease under Republican control.
“No one is going to be able to write the story that we’re rolling back enforcement or going light on enforcement,” Mike Gill, chief of staff to J. Christopher Giancarlo, acting chairman of the CFTC, told a recent commodity markets conference in Florida.
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