September 19, 2018

CFTC Orders Bank of America, N.A. to Pay $30 Million Penalty for Attempted Manipulation and False Reporting 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 Bank of America, N.A. (Bank of America or the Bank) for attempted manipulation of the ISDAFIX benchmark and requiring Bank of America to pay a $30 million civil monetary penalty.

The CFTC Order finds that, beginning in January 2007 and continuing through December 2012 (the Relevant Period), Bank of America made false reports and 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 its derivatives positions, including positions involving cash-settled options on interest rate swaps and interest rate swap futures.

CFTC’s Director of Enforcement Comments

James McDonald, CFTC Director of Enforcement, commented:  “This marks the ninth CFTC enforcement action involving manipulative conduct in connection with the USD ISDAFIX benchmark.  As this case shows, the Commission will continue to work vigilantly to ensure the integrity of critical financial benchmarks and hold all wrongdoers accountable, no matter how widespread the misconduct.”

During the Relevant Period, 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 were published daily 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.  They were issued in several currencies and were 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, were those that were 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 certain other interest rate products.

The Order finds that certain Bank of America traders understood and employed two primary means in their attempts to manipulate USD ISDAFIX rates, each with the goal of moving USD ISDAFIX in the direction that favored Bank of America on specific trading positions at the expense of its counterparties.  The Bank attempted to manipulate USD ISDAFIX by bidding, offering, or trading swap spreads and U.S. Treasuries at and around 11:00 a.m. to affect rates and thereby increase or decrease the Swaps Broker’s reference rates and spreads and influence the final published USD ISDAFIX; and by making false, misleading, or knowingly inaccurate submissions to Swaps Broker concerning swap rates and spreads. 

Attempts to Manipulate Through Trading

According to the Order, on occasion, certain traders at Bank of America 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, with the intent to affect the reference rates and spreads captured by Swaps Broker that Swaps Broker disseminated to panel banks, and thereby to affect the published USD ISDAFIX.  Bank of America traders placed these bids or offers or executed trades in the moments leading into 11:00 a.m. designed in a manner, including timing and pricing, to increase or decrease the price level of swap spreads and/or U.S. Treasuries, with the intent to affect levels reported  on the electronic screen known as the “19901 screen” and USDAFIX fixings.  As one Bank of America trader explained to another in an electronic communication, “pushing the rate higher basically means we rcv a higher rate at the fixing.”

Attempts to Manipulate Through False Reporting

The Order also finds that certain Bank of America traders directed the relevant Bank of America Swaps Desk middle office employee responsible for making USD ISDAFIX submissions (the Submitter) to submit rates and spreads higher or lower than the Submitter otherwise would submit to attempt to affect the final published USD ISDAFIX rates and spreads to benefit the Bank’s positions.  On these occasions, Bank of America’s USD ISDAFIX submissions constituted false, misleading, or knowingly inaccurate reports because they purported to reflect the Bank’s honest view of the true costs of entering into an interest rate swap in particular tenors, but in fact reflected traders’ desire to move USD ISDAFIX higher or lower in order to benefit Bank of America’s positions.  For example, on one quarterly expiration date for swap futures contracts, a Bank of America trader told the Submitter that he was “gonna need 5y7y10y and 30y rates and spreads at 11am,” noting that he “want[ed] them low.”  The trader later instructed the Submitter to “put each of them lower by like 2/10,” and the Submitter complied with the trader’s request.

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In accepting the Bank’s offer, the Commission recognizes Bank of America’s cooperation during the investigation of this matter by the CFTC’s Division of Enforcement (Division), which helped the Division undertake its investigation efficiently and effectively.  The Order also states that Bank of America commenced significant remedial action to strengthen the internal controls and policies relating to all benchmarks, including ISDAFIX. 

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

CFTC Division of Enforcement staff members responsible for this case are Lara Turcik, David C. Newman, Trevor Kokal, Steven I. Ringer, Lenel Hickson, Jr., and Manal M. Sultan.