February 3, 2017

CFTC Orders The Royal Bank of Scotland to Pay $85 Million Penalty for Attempted Manipulation of U.S. Dollar ISDAFIX Benchmark Swap Rates

In Total, the CFTC Has Imposed $570 Million in Penalties for Attempted Manipulation of ISDAFIX Benchmark

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today issued an Order filing and settling charges against The Royal Bank of Scotland plc (RBS) for attempted manipulation of the ISDAFIX benchmark and requiring RBS to pay an $85 million civil monetary penalty. The CFTC Order finds that over a five-year period, beginning in January 2007 and continuing through March 2012 (relevant period), RBS, through the acts of multiple traders, attempted to manipulate the U.S. Dollar International Swaps and Derivatives Association Fix (USD ISDAFIX), a global benchmark reference in a range of interest rate products. RBS engaged in the unlawful conduct in order to benefit certain derivatives positions it held that were priced or valued off of the USD ISDAFIX benchmark.

RBS will be required to take specified steps to implement and strengthen its internal controls and procedures, including measures to detect and deter trading potentially intended to manipulate swap rates such as USD ISDAFIX and to ensure the integrity of interest-rate swap benchmarks.

“People around the world rely on benchmark rates such as ISDAFIX. This is our fourth enforcement action relating to attempts to manipulate the ISDAFIX. 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.

The Order specifically finds that during the relevant period, RBS, through certain of its traders in Stamford, Connecticut, bid, offered, and executed transactions in targeted interest rate products, including both swap spreads and U.S. Treasuries, at the critical 11:00 a.m. fixing time with the intent to affect the reference rates and spreads captured by a leading interest rates swaps broker (Swaps Broker) in the “print” sent to submitting banks, and thereby to affect the published USD ISDAFIX. According to the Order, RBS attempted to manipulate USD ISDAFIX through its trading at the 11:00 a.m. fixing in order to benefit cash-settled swaptions held by RBS that were priced or valued against the USD ISDAFIX benchmark.

ISDAFIX rates and spreads are among the leading benchmarks for interest rate swaps and related derivatives, indicating the prevailing, daily market rate for the fixed leg of a standard fixed-for-floating interest rate swap in various currencies. During the relevant period, USD ISDAFIX rates and spreads were published daily for various maturities of U.S. Dollar-denominated swaps. The 11:00 a.m. USD ISDAFIX rate was used for cash settlement of options on interest rate swaps, or swaptions, and as a valuation tool for certain other interest rate products. For example, USD ISDAFIX was used in settlement of interest rate swap futures contracts and as a component in the calculation of various proprietary interest rate indices and structured products. At times, the USD ISDAFIX was used in the pricing of debt issuances.

During the relevant period, USD ISDAFIX was set each day in a process that began at 11:00 a.m. Eastern Time with the recording of swap rates and spreads from a U.S.-based unit of a leading interest rate swaps broking firm, which disseminated the rates and spreads captured in this 11:00 a.m. “snapshot,” “fix,” or “print” — as it was referred to by traders and brokers — 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.

As found in the Order, RBS traders bid, offered, and executed transactions of swap spreads and U.S. Treasuries contracts at the critical 11:00 a.m. fixing time in order to affect the “print,” i.e., the reference rates captured at 11:00 a.m. and sent to submitting banks, and thereby to affect the published USD ISDAFIX. RBS traders understood that by using swap spreads and/or treasury trading it was possible to move the USD ISDAFIX rate. As one RBS employee explained, “the way to move isdafix is to hit or lift spreads on the screen, and do the opposite in tsy, b/c that is how the rate is derived [sic.].” According to the Order, as captured in emails and audio recordings, RBS traders often discussed their intent to move USD ISDAFIX to benefit their positions. RBS traders would often tell their brokers at Swaps Broker the intent of their trading at 11:00 a.m., for example telling their swap broker, “I’m going to have to get 10s higher and 7s lower.”

Among themselves, RBS traders joked about their attempts to manipulate the USD ISDAFIX. On the same day the CFTC announced it was charging the hedge fund Amaranth with attempted manipulation of the price of natural gas futures, 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. The RBS trader emailed this “joke” to other RBS swaps traders and RBS’s swaps broker employees:

Amaranth tried to Manipulate Gas Prices, CFTC Says…

[Swaps Trader 1] tried for manipulating ISDAFIX3 settlement . . . [Swaps Trader 1] is on a recorded line shouting, “GET THE NINES DOWN [Broker], GET THE NINES DOWN, NOW NOW NOW”. RBS could not be reached for comment.

The Order further finds RBS traders understood how their trading at 11:00 a.m. could have an adverse impact on their counterparties. One noted that “we like tried to f*ck” a bank counterparty on a cash settlement; another noted that they had had a big cash settle with a bank counterparty and had “skrood [sic.] them bigtime.” Another RBS trader noted that RBS did not “actually have that many interbank cash settles and when we do, on average we tend to do badly.” However, he added that “with clients we do okay but they have no idea that it’s off,” referring to the fact that RBS’s non-bank counterparties were unaware that RBS was attempting to move USD ISDAFIX settings to their detriment, according to the Order.

In accepting RBS’s offer of settlement, the CFTC recognizes RBS’s cooperation during the Division of Enforcement’s investigation of this matter, which helped the Division efficiently and effectively undertake its investigation.

The CFTC thanks and acknowledges the assistance of the United Kingdom’s Financial Conduct Authority and the Newark, New Jersey Field Office of the Federal Bureau of Investigation.

CFTC Division of Enforcement staff members responsible for this case are James G. Wheaton, Patrick Daly, Trevor Kokal, David Acevedo, Lenel Hickson, Jr., and Manal M. Sultan.

The following staff members assisted in this case: Candice Aloisi, Jason Fairbanks, Jordon Grimm, David MacGregor, David C. Newman, Mark A. Picard, and K. Brent Tomer.

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With Today’s Action, the CFTC Has Imposed over $5.2 Billion in Penalties in 19 Actions against Banks and Brokers to Address ISDAFIX, FX, and LIBOR Benchmark Abuses

The CFTC has imposed penalties of $5.29 billion in its investigation of manipulation of global benchmark rates. Of this, over $3.4 billion has been imposed for misconduct relating to ISDAFIX, LIBOR, Euribor, and other interest rate benchmarks, and over $1.8 billion in penalties has been imposed for misconduct relating to foreign exchange benchmarks. Below is a summary of the CFTC’s actions:

Foreign Exchange Benchmark Cases

In re Barclays Bank PLC (May 20, 2015) ($400 million penalty) (CFTC Press Release 7181-15)

In re Citibank, N.A. (November 11, 2014) ($310 million penalty) (CFTC Press Release 7056-14)

In re JPMorgan Chase Bank, N.A. (November 11, 2014) ($310 million penalty) (CFTC Press Release 7056-14)

In re The Royal Bank of Scotland plc (November 11, 2014) ($290 million penalty) (CFTC Press Release 7056-14)

In re UBS AG (November 11, 2014) ($290 million penalty) (CFTC Press Release 7056-14)

In re HSBC Bank plc (November 11, 2014) ($275 million penalty) (CFTC Press Release 7056-14)

LIBOR Benchmark Cases

In re Citibank, N.A., and affiliates (May 25, 2016) ($175 million penalty) (CFTC Press Release 7372-16)

In re Deutsche Bank AG (April 23, 2015) ($800 million penalty) (CFTC Press Release 7159-15)

In re UBS AG and UBS Securities Japan Co., Ltd. (December 19, 2012) ($700 million penalty) (CFTC Press Release 6472-12)

In re Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A. (Rabobank) (October 29, 2013) ($475 million penalty) (CFTC Press Release 6752-13)

In re The Royal Bank of Scotland plc and RBS Securities Japan Limited (February 6, 2013) ($325 million penalty) (CFTC Press Release 6510-13)

In re Barclays PLC, Barclays Bank PLC, and Barclays Capital Inc. (June 27, 2012) ($200 million penalty) (CFTC Press Release 6289-12)

In re Lloyds Banking Group plc and Lloyds Bank plc (July 28, 2014) ($105 million penalty) (CFTC Press Release 6966-14)

In re ICAP Europe Limited (September 25, 2013) ($65 million penalty) (CFTC Press Release 6708-13)

In re RP Martin Holdings Limited and Martin Brokers (UK) Ltd. (May 15, 2014) ($1.2 million penalty) (CFTC Press Release 6930-14)

ISDAFIX Benchmark Cases

In re The Royal Bank of Scotland plc (February 3, 2017) ($85 million penalty)

In re The Goldman Sachs Group, Inc., and Goldman, Sachs & Co., N.A., (December 21, 2016) ($120 million penalty) (CFTC Press Release 7505-16)

In re Citibank, N.A., (May 25, 2016) ($250 million penalty) (CFTC Press Release 7371-16)

In re Barclays PLC, Barclays Bank PLC, and Barclays Capital Inc. (May 20, 2015) ($115 million penalty) (CFTC Press Release 7180-15)

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Last Updated: February 3, 2017