CFTC Notifies Justice Department of Criminal Rate Rigging, Looks at Possible Swaps Loophole

The U.S. Commodities Trading Commission has notified the Department of Justice that there is evidence of criminal conduct related to the alleged manipulation of ISDAfix. The regulator had sent subpoenas to the biggest banks in the world in 2012 to find out if the benchmark, used to establish rates for trillions of dollars of financial products and track prices on interest-rate swaps, was rigged. The CFTC, however, can only file civil charges.

Benchmarks are integral to global finance. They help lenders determine what to charge borrowers and pension funds to figure out future obligations, among other uses. Regulators have been investigating claims that banks and brokers seeking to profit helped manipulate certain benchmarks, while investors lost out in the process.

Last week, the Alaska Electrical Pension Fund sued thirteen banks, including UBS (UBS), Citigroup (C), and Bank of America (BAC), and brokerage firm ICAP Plc (IAP) claiming they worked together to rig ISDAfix. UK securities regulators are also looking into the claims.

It was Bloomberg that first reported that CFTC had discovered evidence that big banks had told ICAP brokers to sell or buy as many interest-rate swaps as needed to manipulate ISDAfix to a predetermined level. This would allow banks to make money on swaptions with clients wanting to hedge against moves in interest rates. The ISDAfix rate establishes swaptions prices. However, the Dodd-Frank Act does not allow traders to intentionally intervene in transactions that establish settlement prices.

In other CFTC news, The Wall Street Journal is reporting that the regulator intends to more closely examine U.S. banks that are moving their trading operations abroad to purportedly avoid having to contend with the agency’s rules. Citigroup Inc., JPMorgan Chase and Co. (JPM), Goldman Sachs Group (GS), and Bank of America Corp. (BAC) are among the banks that have terminated their policy of guaranteeing certain swaps that were put out by foreign affiliates, which cuts their ties with the U.S. parent.

Swaps are contracts involving two parties that have consented to trade payments according to fluctuations in benchmarks, such as interest rates. Because of the banks actions, any liabilities for these swaps now fall only with the offshore outfit. However, without the connection to the U.S. parent, contracts won’t be subject to U.S. jurisdiction and the tighter rules established by the Dodd-Frank Act, which includes the requirement that contracts traded over the phone have to be publicly traded on U.S. electronic platforms.

Banks have said this new practice is good for the country because it moves trading activities that might be risky abroad. And while it was U.S. regulators that paved the way for this by mandating that swaps involving firms with no financial ties to the U.S. could get around the rules, now the CFTC is worried that this has created a loophole for banks that exchange swaps in jurisdictions that are not as regulated.

EX-CFTC Gary Gensler has called this the “London loophole,” which he has linked to JPMorgan’s $6 million London whale trading loss. The agency is coordinating its review efforts with the Office of the Comptroller of the Currency, the Securities and Exchange Commission, the Federal Deposit Insurance Corp., and the Federal Reserve.

Our defective swaps fraud lawyers represent investors in recouping their losses. Contact The SSEK Partners Group today.

CFTC Said to Alert Justice Department of Criminal Rate Rigging, Bloomberg, September 8, 2014

CFTC to Scrutinize Swaps Loophole, The Wall Street Journal, September 5, 2014

Agencies Seek Comment on Swap Margin Requirements, CFTC, September 3, 2014

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Securities Lawsuit Accuses Deutsche Bank, JPMorgan Chase, Credit Suisse, and Other Banks of Manipulating ISDAfix, Institutional Investor Securities Blog, September 2, 2014

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