ICAP Capital Markets, now known as Intercapital Capital Markets, is to pay a USD50 million penalty to settle US CFTC charges that, through certain of its brokers, it aided and abetted 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.
A 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 US 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.
James McDonald (pictured), CFTC Director of Enforcement, says: “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 11:00am Eastern Time on ICAP’s trading platform for swap spreads and on an affiliate’s platform for US 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 US 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 US Treasuries at or near the critical 11:00am 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.
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.
The Order states that in accepting ICAP’s offer, the Commission recognises 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.
