Securities Regulation Daily CFTC fines BofA $30M for attempts to manipulate USD ISDAFIX
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Wednesday, September 19, 2018

CFTC fines BofA $30M for attempts to manipulate USD ISDAFIX

By Mark S. Nelson, J.D.

The CFTC announced that Bank of America, N.A. has agreed to pay $30 million to settle an administrative matter in which the agency alleged that BofA attempted to manipulate the U.S. Dollar International Swaps and Derivatives Association Fix (USD ISDAFIX). According to the CFTC, BofA violated Commodity Exchange Act Sections 6(c), 6(d), and 9(a)(2), although BofA neither admitted nor denied the Commission’s findings. As part of the settlement, BofA further agreed to undertake to improve its internal controls and procedures for making submissions to interest rate swaps benchmarks (In the Matter of Bank of America, N.A.CFTC Docket No. 18-34, September 19, 2018).

BofA traders discuss moving ISDAFIX. The CFTC alleged that BofA, between January 2007 and December 2012, took advantage of the process for setting the USD ISDAFIX (the benchmark has changed since BofA’s conduct). At the time, a swaps broker took a "snapshot" of swaps markets by late morning Eastern Time and sent rate and spread data to a panel of banks, including BofA, who then could make submissions that could vary from the reference rates provided by the swaps broker. However, the panel banks often just submitted the unaltered reference rates.

According to the CFTC, BofA attempted to manipulate the USD ISDAFIX by making false submissions that were higher or lower in a degree that was enough to potentially help BofA’s derivatives positions. BofA traders also made bids, offers, and/or executed swap spreads and/or US. Treasuries trades at the time the swaps broker took its market snapshot with the goal of manipulating the USD ISDAFIX. BofA’s submissions could have affected its USD ISDAFIX benchmark exposures with respect to European swaptions and swaps futures cash settlements.

One of several exchanges between BofA traders cited by the CFTC captured the bank’s goal: "’so by paying [i.e., buying] all those 5y spreads were we trying to push the price in a certain direction or just for our position[?]’" The trader responded that the answer was "’both.’" He explained: "’at 11am we had to sell 3B in 5y notes [i.e., Treasuries] . . . so we got short spreads . . . we needed to buy spreads . . . so buying them before and pushing the rate higher basically means we rcv a higher rate at the fixing . . . we wanted the highest rate possible at 11am . . . assuming we have all or most of it hedged before that.’" The traders then discussed how the particular action would generate $4 million for BofA. A subsequent profit and loss email sent to BofA’s swaps desk highlighted the gain.

Penalties. The CFTC imposed a civil monetary penalty of $30 million on BofA. BofA also must cease and desist from violating the relevant provisions of the CEA and the bank must abide by several undertakings. Specifically, BofA must continue its remedial efforts regarding the implementation of adequate internal controls and procedures for making submissions to interest rate swaps benchmarks. Additionally, BofA must continue to cooperate with the CFTC in the matter; the CFTC’s order had noted BofA’s cooperation and that the bank had already begun to improve its relevant policies and procedures.

"This marks the ninth CFTC enforcement action involving manipulative conduct in connection with the USD ISDAFIX benchmark," said James McDonald, CFTC Director of Enforcement. "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."

The order is CFTC Docket No. 18-34.

Companies: Bank of America, N.A.

MainStory: TopStory CommodityFutures Derivatives FinancialIntermediaries Swaps

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