By Lene Powell, J.D.
The CFTC settled charges against The Royal Bank of Scotland plc (RBS), finding that certain of the bank’s traders attempted to manipulate U.S. Dollar ISDAFIX benchmark swap rates over the course of five years. The traders executed key transactions at the time of the daily fixing window in order to affect reference rates submitted for calculation of the benchmark, with the aim of benefiting the bank’s derivatives positions priced or valued off of the benchmark. In addition to paying an $85 million civil monetary penalty, RBS must strengthen its internal controls and procedures, including taking specific steps to detect and deter manipulative trading (In the Matter of The Royal Bank of Scotland plc, February 3, 2017).
The settlement resolves the CFTC’s fourth enforcement action involving the ISDAFIX benchmark, and brings the overall amount of penalties imposed by the CFTC in 19 benchmark cases to $5.2 billion.
“These actions, and the CFTC’s previous cases against those who sought to corrupt the LIBOR and foreign exchange benchmark rates, make clear that the Commission takes very seriously its role in ensuring the integrity of any and all benchmarks used in our markets,” said Aitan Goelman, Director of the CFTC’s Division of Enforcement.
ISDAFIX benchmark. USD ISDAFIX rates and spreads are among the leading benchmarks for interest rate swaps and related derivatives. During the relevant time, USD ISDAFIX rates and spreads were published daily for various maturities of U.S. dollar-denominated swaps, being used for various purposes including cash settlement of options on interest rate swaps, valuation of certain interest rate products, and the pricing of debt issuances.
At the time, USD ISDAFIX was set in a daily process in which a leading interest rate swaps broking firm disseminated rates and spreads captured in an 11 a.m. “fix” or “print” to a panel of banks including RBS. The banks then made submissions to indicate where they would each bid or offer interest rate swaps to a dealer of good credit.
Attempted manipulation. The order found that between 2007 and 2012, certain RBS traders in Stamford, Connecticut engaged in manipulative conduct to move USD ISDAFIX rates in whichever direction benefitted their positions. The traders bid, offered, and/or traded swap spread trades at and around the swaps broker’s 11 a.m. print, attempting to move reference rates and spreads by a quarter basis point or more.
As detailed in the order and a list of examples of misconduct, the traders identified RBS's target print, the amount that RBS was willing to spend to achieve that print (which they called "ammo"), and whether RBS wanted to use less than the full amount of ammo if possible. The traders then used a combination of timing techniques and ammo to try to get the desired result, discussing strategies both among themselves and with employees at the swaps broker. They generally tried to carry out the manipulative strategies at the lowest cost possible, but because affecting USD ISDAFIX could be so valuable, traders were sometimes willing to incur unnecessary transaction costs.
Traders joked about being caught by the CFTC. Conversations also indicated that the traders knew their manipulative conduct sometimes had an adverse impact on their counterparties. In one example, when a trader learned that an upcoming corporate bond pricing would take place right at 11 a.m., he wrote to a non-RBS employee, “Awesome—love it when corporates get boned by the 11:00 screen games.”
Sanctions. According to the order’s findings, which RBS did not admit or deny, the traders’ actions constituted attempted manipulation in violation of Sections 9(a)(2) and 6(c)(1),(3) of the Commodity Exchange Act, as well as Commission Regulation 180.2. RBS was liable as principal.
RBS was ordered to pay an $85 million civil monetary penalty, the smallest fine for the four ISDAFIX cases, which range from $115 million (Barclays) to $250 million (Citibank). The ISDAFIX penalties are smaller on average than those for attempted manipulation of LIBOR or foreign exchange benchmarks.
RBS represented that it had already taken certain measures to ensure the integrity of benchmark submissions, including increasing surveillance, implementing new recordkeeping measures, and stepping up employee training. RBS will also take further steps as specified in the order.
The case is CFTC Docket No. 17-08.