September 18, 2018

CFTC Orders ICAP Capital Markets LLC to Pay $50 Million Penalty for Aiding and Abetting Attempted Manipulation of U.S. Dollar ISDAFIX Benchmark Swap Rates

Washington, DC – The Commodity Futures Trading Commission (CFTC or Commission) today issued an Order filing and settling charges against ICAP Capital Markets LLC (ICAP), now known as Intercapital Capital Markets LLC (ICAP), for, by and through certain of its brokers, aiding and abetting numerous attempts by several of its bank clients to manipulate the ISDAFIX benchmark, a leading global benchmark referenced in a range of interest rate products, and requiring ICAP to pay a $50 million civil monetary penalty.

The CFTC Order finds that over more than five years, beginning in at least January 2007 and continuing through December 2012 (the Relevant Period), ICAP’s swaps brokers were regularly enlisted by traders at bank clients to assist in attempting to manipulate the U.S. Dollar International Swaps and Derivatives Association Fix (USD ISDAFIX) for the benefit of their bank clients’ derivatives positions, including positions involving cash-settled options on interest rate swaps.

CFTC’s Director of Enforcement Comments

James McDonald, CFTC Director of Enforcement, commented: “When intermediaries in our markets help others commit wrongdoing, they will be held accountable.  This matter is one in a series of CFTC actions that continues to demonstrate the Commission’s unrelenting commitment to protect those who rely on the integrity of critical financial benchmarks.  There is no room for manipulation of our markets, and we will continue to pursue both those who seek to manipulate and anyone who chooses to assist them.” 

The Order explains that during the Relevant Period, ICAP initiated the setting of USD ISDAFIX each day by capturing and recording swap rates and spreads based on trading activity at or around 11:00 a.m. Eastern Time on ICAP’s trading platform for swap spreads and on an affiliate’s platform for U.S. Treasury securities.  This was known as the “print.”  After the “print” and a submissions process, undertaken by a panel of contributing banks, ISDAFIX rates and spreads were published daily during the Relevant Period, and were 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.  USD ISDAFIX was issued in several currencies and published for various maturities of U.S. Dollar-denominated swaps.  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 certain other interest rate products.

According to the Order, traders at several banks often attempted to manipulate USD ISDAFIX by bidding, offering, and executing transactions in targeted interest rate products, including swap spreads and U.S. Treasuries at or near the critical 11:00 a.m. fixing time to affect rates on the electronic interest rate swap screen known as the “19901 screen” and thereby increase or decrease ICAP’s “print” and influence the final published USD ISDAFIX. 

Early in the Relevant Period, ICAP brokers and their bank trader clients sometimes explicitly discussed traders’ intent to manipulate USD ISDAFIX.  For example, in 2007, one broker told a trader from Bank A:  “If you want to affect it at eleven, you tell me which way you want to affect it, we’ll, we’ll attempt to affect it that way.”  In November 2008, another trader from that same bank told the same broker:  “I want a low ISDAFIX in 2s,” and “I don’t want to burn anything,” which meant that he would prefer not to execute any transactions if possible, he just wanted to affect the rate.  Over time, an understanding developed between many of the brokers and their bank trader clients, and their communications became less explicit.  By April 2011, a third trader at that bank needed only to bid swap spreads in the moments before 11:00 a.m., and the same broker immediately understood the intent, asking:  “You want the screen up?  Is that the idea?”  “Yes,” the trader replied.

The Order finds that ICAP brokers would not only assist traders in their manipulative attempts, but on many occasions would suggest ways to manipulate USD ISDAFIX more effectively.  For example, in May 2008, another ICAP broker explained to a trader at a different bank how the manipulation of the USD ISDAFIX at 11:00 a.m. was best done:

The easiest way to accomplish the screen print is by hitting the bid and keeping offered at the hit price, the only problem is what if someone has the opposit [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 whatever it takes to get the print . . . there were instances where [Bank B] will do 2 yards of 5s or 10s at 11 oclock [sic] to get his print . . . I DONT [sic] THINK [Bank B] KNOWS WHAT THEY DO AT 11, THATS [sic] NOT THEIR MAIN CONCERN, ITS [sic] THE PRINT THAT MATTERS.

The Order provides similar examples involving multiple banks and medium term swaps brokers at ICAP.  ICAP brokers’ facilitation of their client banks’ manipulative trading enabled the brokers to maintain good relationships with the bank traders and to earn millions of dollars in broker commissions.

ICAP’s role in connection with the publication of reference rates and collection of data for the ISDAFIX benchmark rate setting process ended in 2014.  As part of its offer of settlement that the Commission accepted, ICAP represented that its voice broking business, including the swaps desks that were involved with the ISDAFIX rate setting process, was sold to another business in December 2016, and that prior to that sale, ICAP undertook steps intended to make reasonable efforts to ensure the integrity of USD interest rate swap spreads trading that would be published on benchmark screens and/or would be used in connection with a benchmark process. 

The Order states that in accepting ICAP’s offer, the Commission recognizes ICAP’s cooperation with the Division of Enforcement’s investigation in this matter.  Accordingly, the civil monetary penalty imposed on ICAP reflects the level of cooperation ICAP provided during the course of the 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.

The following CFTC staff members assisted in this case: Jason Fairbanks, Jordon Grimm, K. Brent Tomer, and James Wheaton.

CFTC Division of Enforcement staff members responsible for this case are Mark A. Picard, Trevor Kokal, David C. Newman, David W. Oakland, Candice Aloisi, David W. MacGregor, Lenel Hickson, Jr., and Manal M. Sultan.