Digital Assets Report


Like this article?

Sign up to our free newsletter

RBS fined USD85m for attempted manipulation of US dollar ISDAFIX benchmark swap rates

Related Topics

The Royal Bank of Scotland (RBS) is to pay a USD85 million civil monetary penalty to settle CFTC charges that over a five-year period from January 2007 through March 2012, through the acts of multiple traders, RBS attempted to manipulate the US Dollar International Swaps and Derivatives Association Fix (USD ISDAFIX).

The CFTC charges say that RBS engaged in the unlawful conduct in order to benefit certain derivatives positions it held that were priced or valued off of the USD ISDAFIX benchmark.
RBS will be required to take specified steps to implement and strengthen its internal controls and procedures, including measures to detect and deter trading potentially intended to manipulate swap rates such as USD ISDAFIX and to ensure the integrity of interest-rate swap benchmarks.
“People around the world rely on benchmark rates such as ISDAFIX. This is our fourth enforcement action relating to attempts to manipulate the ISDAFIX. These actions, and the CFTC’s previous cases against those who sought to corrupt the LIBOR and foreign exchange benchmark rates, make clear that the Commission takes very seriously its role in ensuring the integrity of any and all benchmarks used in our markets,” says Aitan Goelman, director of the CFTC’s Division of Enforcement.
The order specifically finds that during the relevant period, RBS, through certain of its traders in Stamford, Connecticut, bid, offered, and executed transactions in targeted interest rate products, including both swap spreads and US Treasuries, at the critical 11am fixing time with the intent to affect the reference rates and spreads captured by a leading interest rates swaps broker in the “print” sent to submitting banks, and thereby to affect the published USD ISDAFIX. According to the order, RBS attempted to manipulate USD ISDAFIX through its trading at the 11am fixing in order to benefit cash-settled swaptions held by RBS that were priced or valued against the USD ISDAFIX benchmark.
ISDAFIX rates and spreads are among the leading benchmarks for interest rate swaps and related derivatives, indicating the prevailing, daily market rate for the fixed leg of a standard fixed-for-floating interest rate swap in various currencies. During the relevant period, USD ISDAFIX rates and spreads were published daily for various maturities of US Dollar-denominated swaps. The 11am USD ISDAFIX rate was used for cash settlement of options on interest rate swaps, or swaptions, and as a valuation tool for certain other interest rate products. For example, USD ISDAFIX was used in settlement of interest rate swap futures contracts and as a component in the calculation of various proprietary interest rate indices and structured products. At times, the USD ISDAFIX was used in the pricing of debt issuances.
During the relevant period, USD ISDAFIX was set each day in a process that began at 11am Eastern Time with the recording of swap rates and spreads from a US-based unit of a leading interest rate swaps broking firm, which disseminated the rates and spreads captured in this 11am “snapshot,” “fix,” or “print” — as it was referred to by traders and brokers — to a panel of banks including RBS. The banks then made submissions to indicate where they would each bid or offer interest rate swaps to a dealer of good credit.
As found in the order, RBS traders bid, offered, and executed transactions of swap spreads and US Treasuries contracts at the critical 11am fixing time in order to affect the “print,” i.e., the reference rates captured at 11am and sent to submitting banks, and thereby to affect the published USD ISDAFIX. RBS traders understood that by using swap spreads and/or treasury trading it was possible to move the USD ISDAFIX rate. As one RBS employee explained, “the way to move isdafix is to hit or lift spreads on the screen, and do the opposite in tsy, b/c that is how the rate is derived [sic.].” According to the order, as captured in emails and audio recordings, RBS traders often discussed their intent to move USD ISDAFIX to benefit their positions. RBS traders would often tell their brokers at swaps broker the intent of their trading at 11am, for example telling their swap broker, “I’m going to have to get 10s higher and 7s lower.”
Among themselves, RBS traders joked about their attempts to manipulate the USD ISDAFIX. On the same day the CFTC announced it was charging the hedge fund Amaranth with attempted manipulation of the price of natural gas futures, an RBS swap trader converted a news story about the lawsuit into a prescient “joke” where RBS took the place of Amaranth as the manipulator sued by the government.
The order further finds RBS traders understood how their trading at 11am could have an adverse impact on their counterparties. One noted that “we like tried to f*ck” a bank counterparty on a cash settlement; another noted that they had had a big cash settle with a bank counterparty and had “skrood [sic.] them bigtime.” Another RBS trader noted that RBS did not “actually have that many interbank cash settles and when we do, on average we tend to do badly.” However, he added that “with clients we do okay but they have no idea that it’s off,” referring to the fact that RBS’s non-bank counterparties were unaware that RBS was attempting to move USD ISDAFIX settings to their detriment, according to the order.
In accepting RBS’s offer of settlement, the CFTC recognises RBS’s cooperation during the Division of Enforcement’s investigation of this matter, which helped it efficiently and effectively undertake its investigation.

Like this article? Sign up to our free newsletter

Most Popular

Further Reading