Securities Regulation Daily CFTC fines Citibank $425M for attempted benchmark manipulation, false reporting
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Wednesday, May 25, 2016

CFTC fines Citibank $425M for attempted benchmark manipulation, false reporting

By Lene Powell, J.D.

Citibank and two Japanese affiliates agreed to pay fines of $425 million to the CFTC for attempted manipulation and false reporting of multiple benchmark interest rates. Citibank traders skewed the bank’s submissions to rate-setting panels to benefit the bank’s own derivatives positions, as well as to avoid media scrutiny of the bank’s liquidity stress during the 2008 financial crisis. In addition to the fines, the respondents were ordered to comply with specific undertakings to ensure the integrity of benchmark interest rate submissions. The settlement reflected Citibank’s cooperation and self-reporting of the misconduct (In the Matter of Citibank, N.A., (USC ISDA Fix and LIBOR-TIBOR), May 25, 2016).

“[T]he CFTC’s vigilance includes holding a financial institution, like Citi, responsible each time it acts to undermine a benchmark for its personal profit or benefit,” said Aitan Goelman, CFTC’s Director of Enforcement. “At the same time, the CFTC recognizes Citi for promptly self-reporting the Yen LIBOR misconduct to the Division of Enforcement. The value of self-reporting violations in a timely and effective manner and providing cooperation consistent with that of a responsible player in our markets will not go unnoticed by the CFTC.”

USD ISDAFIX. Between 2007 and 2012, Citibank N.A attempted to manipulate the U.S. Dollar International Swaps and Derivatives Association Fix (USD ISDAFIX), a leading global benchmark referenced in a variety of interest rate products. USD ISDAFIX was set in a process that began each day at 11 am Eastern Time and involved submissions by panel banks to a leading interest rate swaps broking firm.

The banks’ submissions were supposed to reflect the midpoint of where a bank would itself offer and bid a swap to a dealer of good credit as of 11 a.m. Eastern Time. Banks were not supposed to base their submissions on their own derivatives trading positions or profitability. But on many occasions, some Citibank traders made USD ISDAFIX submissions higher or lower in order to benefit the bank’s positions priced or valued against the benchmark. In chat rooms, traders described USD ISDAFIX as being “surprisingly easy to push” and exchanged tips on the best way to influence the rate. Traders also tried to manipulate the benchmark by executing trades in various interest rate products around the critical 11 a.m. window.

The CFTC said the attempted manipulation violated Sections 6(c), 6(d), and 9(a)(2) of the Commodity Exchange Act (CEA). The skewed submissions also constituted false, misleading, or knowingly inaccurate reports in violation of those sections. In imposing the $250 million civil monetary penalty, the CFTC noted that Citibank initially balked at producing documents and told the regulator that certain misconduct didn’t happen. However, the bank’s cooperation improved over the course of the investigation, and it also took remedial actions to improve its internal controls. Without admitting or denying the findings, Citibank agreed to the penalty and undertakings.

LIBOR and TIBORs. Similar to the attempted manipulation of USD ISDAFIX, Citibank and two Japanese affiliates also attempted to manipulate two additional interest rate benchmarks: the Yen London Interbank Offered Rate (LIBOR) and the Euroyen Tokyo Interbank Offered Rate (Euroyen TIBOR). On multiple occasions, a Tokyo-based senior Yen derivatives trader used his contacts at other Yen LIBOR panel banks and at interdealer brokers to influence the Yen LIBOR submissions of other Yen panel banks. In addition, a senior manager in charge of one Japanese affiliate’s Tokyo interest rates derivatives trading desk pressured another affiliate’s Euroyen TIBOR submitters to adjust their submissions to benefit the Yen trader’s derivatives trading positions. On a few occasions, Euroyen TIBOR submitters at that affiliate took the manager’s requests into account in making Euroyen TIBOR submissions.

Notably, the submitters still skewed submissions even after they knew the CFTC was investigating the bank’s LIBOR submissions process. Senior managers also did not tell legal or compliance departments that the senior Yen trader informed them he had engaged in attempted benchmark manipulation at the last place he worked. However, Citi did self-report the misconduct to the CFTC, which took this and other cooperation into account in imposing the $175 million civil monetary penalty. The order also required the respondents to complete certain undertakings, including determining submissions according to specific factors, implementing firewalls and other internal controls, and making regular reports to the CFTC.

The case is CFTC Docket Nos. 16-1616-17.

Companies: Citibank, N.A.

MainStory: TopStory Derivatives Enforcement FinancialIntermediaries FraudManipulation Swaps CFTCNews

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