Today, the Commodity Futures Trading Commission (CFTC or Commission) issued two orders settling charges against, respectively, (i) HSBC Bank USA, N.A. (HSBC) for fraudulent and manipulative swaps trading and spoofing; and (ii) HSBC, HSBC Securities (USA) Inc., and HSBC Bank plc (collectively, HSBC Affiliates) for failing to maintain, preserve, and produce records in compliance with CFTC recordkeeping requirements with respect to certain offline communications (often carried out through chat or social media messaging platforms).  HSBC and the HSBC Affiliates also failed to diligently supervise matters related to their CFTC-registered businesses with respect to each set of conduct.  These orders require HSBC to pay $45 million for the fraudulent and manipulative swaps trading and spoofing, and related violations, and the HSBC Affiliates to pay $30 million for the violations relating to offline communications.  HSBC and the HSBC Affiliates also must implement immediate and effective remediation measures to ensure compliance with the relevant Commodity Exchange Act (CEA) and Commission regulations, including ensuring appropriate recordkeeping and supervision.

HSBC’s fraudulent and manipulative swaps trading and spoofing constitute severe betrayals of client trust, designed specifically to benefit HSBC to the detriment of its clients.  Supervisors and senior managers at HSBC were aware of, and at times involved in, this misconduct, underlining the severity of HSBC’s compliance and supervision failures.  In addition, HSBC failed to establish policies and procedures to prevent or detect this sort of misconduct, and indeed failed adequately to respond in certain instances where it became aware of misconduct.  At the same time, the settlement order recognizes that HSBC has undertaken significant remediation since the conduct at issue (most of which occurred more than five years ago), and also contains additional undertakings to prevent misconduct around pre-hedging.  The order also recognizes HSBC’s substantial cooperation with the Division of Enforcement’s investigation of this matter, and notes that the civil monetary penalty imposed here—$45 million—was reduced from what it otherwise would have been in recognition of that cooperation and remediation.

This conduct is deeply troubling, and, while I recognize that determining an appropriate penalty is more an art than a science, I sincerely hope that market participants understand the seriousness with which we view these sorts of violations by registrants and take note that similar misconduct in the future will likely be met with even more significant penalties.

With respect to the second order issued today, relating to recordkeeping and supervision failures in connection with offline communications, the violations by the HSBC Affiliates are substantively similar to those addressed in orders issued last September against a number of other banks and their affiliated futures commission merchants, which I addressed at that time,[1] as well as the settlement announced yesterday with The Bank of Nova Scotia and Scotia Capital USA Inc. (together, “BNS”).[2]  As I noted then, the egregious and widespread nature of the use of unapproved communications methods—which were not monitored, reviewed, and captured as required by CFTC regulations—undermines the recordkeeping and supervisory frameworks that we rely on registrants to have in place not only to prevent and detect misconduct, but to enable the Commission to conduct examinations and investigations and to enforce the CEA and Commission regulations.  I continue to emphasize that registrants must update and adapt their internal compliance programs to keep up with technological change, but, even more importantly, must ensure a culture of compliance at all levels of their organization even as markets face rapid change.

I applaud the excellent work of the Division of Enforcement staff for their efforts in bringing these two separate cases, including Devin Cain, James Wheaton, Benjamin Rankin, Alejandra de Urioste, R. Stephen Painter, Jr., Lenel Hickson, Jr., and Manal M. Sultan.

[1] See Statement of Commissioner Kristin N. Johnson Regarding CFTC Orders for $700 Million Penalty Against Bank-Affiliated Entities for Offline Communications, Sept. 27, 2022, https://www.cftc.gov/PressRoom/SpeechesTestimony/johnsonstatement092722 (discussing administrative orders settling claims arising from similar offline communications with eleven swap dealers and their affiliated futures commission merchants).

[2] See Statement of Commissioner Kristin N. Johnson Regarding CFTC Order Against The Bank of Nova Scotia and Scotia Capital USA Inc. for Recordkeeping and Supervision Failures Relating to Offline Communications, May 11, 2023, https://www.cftc.gov/PressRoom/SpeechesTestimony/johnsonstatement051123.  In addition, as with the cases announced in September and with BNS, the Securities & Exchange Commission (SEC) is also bringing an action against HSBC-affiliated entities registered with the SEC for similar recordkeeping and supervision violations, with the imposition of an additional penalty of $15 million.  See SEC Release No. 2023-91, SEC Charges HSBC and Scotia Capital with Widespread Recordkeeping Failures, May 11, 2023, https://www.sec.gov/news/press-release/2023-91.