Release Number 7776-18
August 29, 2018
CFTC Orders BNP Paribas to Pay $90 Million Penalty for Attempted Manipulation and False Reporting of U.S. Dollar ISDAFIX Benchmark Swap Rates
Washington, DC – The Commodity Futures Trading Commission (CFTC) issued an Order today filing and settling charges against BNP Paribas Securities Corp. (BNP Paribas or the Bank) for attempted manipulation of the ISDAFIX benchmark and requiring BNP Paribas to pay a $90 million civil monetary penalty. BNP Paribas’ principal office is located in New York, New York.
The CFTC Order finds that over a five-year period, beginning in or about May 2007 and continuing through at least August 2012 (the Relevant Period), BNP Paribas attempted to manipulate the U.S. Dollar International Swaps and Derivatives Association Fix (USD ISDAFIX), a leading global benchmark referenced in a range of interest rate products, to benefit BNP Paribas’s derivatives positions in instruments such as cash-settled options on interest rate swaps and certain exotic structured products. BNP Paribas’s unlawful conduct involved multiple traders and included supervisors, the Order finds.
CFTC Director of Enforcement Comments
James McDonald, CFTC Director of Enforcement, commented: “This matter, the seventh enforcement action relating to the USD ISDAFIX benchmark, further demonstrates that the CFTC will continue to be vigilant and aggressive in protecting the integrity of our markets. And we won’t stop until all wrongdoers are held accountable—no matter how broadly the misconduct stretches across the industry.”
During the Relevant Period, the USD ISDAFIX was set each day in a process that began at 11:00 a.m. Eastern Time with the capture and recording of swap rates and spreads from a U.S. based unit of a leading interest rate swaps brokering firm (Swaps Broker). ISDAFIX rates and spreads are published daily and are meant to indicate the prevailing mid-market rate, at a specific time of day, for the fixed leg of a standard fixed-for-floating interest rate swap. They are issued in several currencies and are published for various maturities of U.S. Dollar-denominated swaps. The most widely used USD ISDAFIX rates and spreads, and the ones at issue in this Order, are those that are intended to indicate the prevailing market rate as of 11:00 a.m. Eastern Time. The 11:00 a.m. USD ISDAFIX rate was used for the cash settlement of options on interest rate swaps, or swaptions, and as a valuation tool for a wide range of products across financial markets.
In addition to the $90 million civil monetary penalty, the Order requires BNP Paribas to cease and desist from further violations as charged, and take specified remedial steps, including measures to detect and deter trading intended to manipulate swap rates such as the USD ISDAFIX, to ensure the integrity and reliability of the Bank’s benchmark submissions, and to improve related internal controls.
The Order finds that BNP Paribas, through its traders, bid, offered, and executed transactions in interest rate swap spreads in a manner deliberately designed—in timing, price, and other respects—to influence the published USD ISDAFIX in order to benefit the Bank in its derivatives positions. In addition, the Order finds that BNP Paribas, through its employees making the Bank’s USD ISDAFIX submissions, also attempted to manipulate and made false reports concerning the USD ISDAFIX by skewing the Bank’s submissions in order to benefit the Bank at the expense of its derivatives counterparties and clients.
Attempts to Manipulate Through Trading
According to the Order, BNP Paribas traders attempted to manipulate the USD ISDAFIX by bidding, offering, and executing transactions of swap spreads 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. Contemporaneous communications reveal that BNPP traders explicitly coordinated their efforts to manipulate the 11:00 a.m. USD ISDAFIX in accordance with the preferences expressed by BNPP options traders in order to benefit the option traders’ settlements of basic vanilla swaptions as well as their complex derivatives positions related to the periodic resets and settlements of exotic constant maturity swaps (CMS) products.
As found in the Order, BNPP traders recognized that “11am print manipulation” could present both risks and opportunities for the bank, including for sophisticated exotics positions that the options desk held, such as correlation and volatility swaps. Certain BNPP traders described such attempts to manipulate the USD ISDAFIX as ways to “play the fixing,” “push the screen,” and “play the screen game.” As found in the Order, the communications among BNPP traders could be explicit, such as when a swaps trader confirmed in all-capitals to an options trader: “ok you need the fixing to be AS HIGH AS POSSIBLE,” or when an options trader stated to a group of BNPP traders, “at 11am we want to fix as low as possible.” On one occasion, BNPP options and swaps traders likened their illegal efforts to manipulate the USD ISDAFIX to lyrics of popular songs by Montell Jordan and Salt-N-Pepa:
- BNPP Options Trader: that’s a great fixing
- BNPP Swaps Trader: this is how we do it here :-P
- BNPP Options Trader: push it real good
To move the USD ISDAFIX in the direction or directions desired by the options desk, BNPP swaps traders strategized with Swaps Broker employees to accomplish the traders’ goals. For example, BNPP swaps traders discussed with Swaps Broker employees the traders’ intention to accomplish certain swap spread screen prints or directional moves at 11:00 a.m., rather than a desire to buy or sell a specific amount of swap spreads, and, as shown in contemporaneous communications, “the easiest way to accomplish the screen print” or directional move. To affect the USD ISDAFIX print more effectively and at minimal cost, BNPP swaps traders also typically timed their trading activity to try to be the last screen-moving event before the 11:00 a.m. print.
Attempts to Manipulate Through False Reporting
To complement these manipulative efforts, as found in the Order, on certain occasions during the Relevant Period BNP Paribas traders attempted to manipulate the USD ISDAFIX by making USD ISDAFIX submissions higher or lower for the purpose of benefitting derivative positions priced or valued against the benchmark. As the Order finds, these submissions by BNP Paribas were false, misleading, or knowingly inaccurate because they did not report where BNP Paribas would itself bid and offer swaps absent a desire to manipulate the USD ISDAFIX, but rather reflected prices that were more favorable to the Bank’s specific derivatives positions. Multiple BNPP Options Desk traders engaged in communications about USD ISDAFIX submissions with BNPP Swaps Desk traders, and supervisors on the Swaps Desk and Options Desk were aware of such requests and their connection to swaption cash settlements and/or CMS resets.
The Order describes multiple examples of these strategies for attempted manipulation and false reporting by BNP Paribas traders during the Relevant Period.
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In accepting the Bank’s Offer, the Commission recognizes BNP Paribas’s cooperation with the Division of Enforcement’s investigation. The Order notes BNP Paribas’s significant cooperation during the Division of Enforcement’s investigation of this matter and recognizes that BNPP provided important information to the Division that helped the Division efficiently and effectively to undertake its investigation. The Order also states that BNPP commenced significant remedial action to improve internal controls and policies related to all benchmarks, including ISDAFIX and its successor benchmark, independent of the Commission’s investigation.
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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.
The following staff members assisted in this case: Candice Aloisi, Jason Fairbanks, Jordon Grimm, David C. Newman, David W. Oakland, Mark A. Picard, and James G. Wheaton.
CFTC Division of Enforcement staff members responsible for this case are Gates S. Hurand, Trevor Kokal, K. Brent Tomer, Lenel Hickson, Jr., and Manal M. Sultan.