The Commodity Futures Trading Commission (CFTC) has issued an Order filing and settling charges against Deutsche Bank Securities Inc. (DBSI) for attempted manipulation of the ISDAFIX benchmark and requiring DBSI to pay a $70 million civil monetary penalty.
The CFTC Order finds that over a five-year period, beginning in at least January 2007 and continuing through May 2012 (the Relevant Period), DBSI made false reports and through the acts of multiple traders attempted to manipulate the U.S. Dollar International Swaps and Derivatives Association Fix (USD ISDAFIX), a leading global benchmark referenced in a range of interest rate products, to benefit its derivatives positions, including positions involving cash-settled options on interest rate swaps.
CFTC’s Enforcement Director Comments
James McDonald, CFTC Director of Enforcement, commented: “This action reflects the CFTC’s continued and vigilant commitment to protect those who rely on the integrity of critical financial benchmarks. There is no room in our markets for manipulation—we will continue to work hard to stamp it out, wherever we find it.”
During the Relevant Period, USD ISDAFIX was set each day in a process that began at 11:00 a.m. Eastern Time with the capture and recording of swap rates and spreads from a U.S. based unit of a leading interest rate swaps broking firm (“Swaps Broker”).
ISDAFIX rates and spreads are published daily and are 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. They are issued in several currencies and are published for various maturities of U.S. Dollar-denominated swaps. The most widely used USD ISDAFIX rates and spreads, and the ones at issue in this Order, are those that are intended to indicate the prevailing market rate as of 11:00 a.m. Eastern Time. The 11:00 a.m. USD ISDAFIX rate is used for the cash settlement of options on interest rate swaps, or swaptions, and as a valuation tool for certain other interest rate products.
The Order finds that certain DBSI options and/or swaps traders understood and employed two primary means in their attempts to manipulate USD ISDAFIX rates: trading attempted manipulation and submission attempted manipulation.
Trading Attempted Manipulation
According to the Order, DBSI attempted to manipulate the USD ISDAFIX by bidding, offering, and executing transactions in targeted interest rate products, including swap spreads and U.S. Treasuries at or near the critical 11:00 a.m. fixing time to affect rates on the electronic interest rate swap screen known as the “19901 screen” and thereby increase or decrease the Swaps Broker’s reference rates and influence the final published USD ISDAFIX. As evidenced in recorded calls and electronic communications, DBSI traders talked about “pushing” or “moving” the fix, or “getting the print” at a price, to benefit DBSI’s positions.
In order to effect these goals—through communications involving multiple DBSI traders, on more than one DBSI trading desk, spanning several years—DBSI Swap traders would tell the Swaps Broker their need for a certain swap level at 11:00 a.m. or their need to have the level moved up or down. On at least one occasion, the Swaps Broker expressed the need to know how much “ammo” certain DBSI traders had to use in order to move the screen at 11:00 a.m.
On February 28, 2007, for example, the Swaps Broker told a DBSI Swaps trader: “I had to do what I had to do to keep ‘em down, right…We got the print…50 is not going to hold it.” As this conversation demonstrates, the Swaps Broker fully understood that the DBSI trader wanted to keep the price down and get the print that would benefit DBSI’s position.
DBSI Traders Knew Their Conduct Was Illegal
The Order finds, further, that DBSI traders knew their conduct in attempting to manipulate the USD ISDAFIX was illegal. On one occasion, when a DBSI Swaps trader stated to a broker, “I really have no desire to ever trade equities. It’s just a field day for the feds,” the broker responded: “this will be over soon as well and if they ever figured out exactly how pricing happened through [the Swaps Broker] on a daily basis a lot of people would actually do jail time.”
Submission Attempted Manipulation
The Order also finds that on certain days in which DBSI had a trading position settling or resetting against the USD ISDAFIX, certain DBSI Swaps Desk employees responsible for making USD ISDAFIX submissions (the “Submitter” or “Submitters”) attempted to manipulate the final published USD ISDAFIX rates by submitting rates that were false, misleading, or knowingly inaccurate because they purported to reflect DBSI’s honest view of the true costs of entering into an interest rate swap in particular tenors, but in fact reflected traders’ desire to move USD ISDAFIX higher or lower in order to benefit DBSI’s positions. Submitters made false submissions for DBSI by skewing the rates and spreads submitted to the Swaps Broker in the direction that could have moved the USD ISDAFIX setting to benefit DBSI’s trading positions.
DBSI memorialized its manipulative submissions conduct in a Swap Desk Guide, authored by a Submitter, which stated that: “Swap dealer desks submit 11 a.m. levels of rate and spreads for option striking purposes. The options desk may ask for specific levels.” The then-Head of the Swaps Desk at DBSI understood that if an Options trader asked the Swaps Desk for specific levels and the Submitter complied with that request, that would be wrong because that would be “fixing the rate.”
DBSI has taken specified steps to implement and strengthen its internal controls and procedures relating to the fixing of interest-rate swaps benchmarks, including measures to detect and deter trading or other conduct potentially intended to manipulate directly or indirectly swap rates, including benchmarks based on interest-rate swaps and to ensure the integrity of the fixing of any interest-rate swap benchmark.
In the Order, the Commission advised that, under the circumstances, disqualification from making certain offerings should not arise under Rule 262(a) of Regulation A and Rule 506(d)(1) of Regulation D of the Securities and Exchange Commission (SEC), 17 C.F.R. §§ 230.262(a), 230.506(d)(1) (2017), as a consequence of the Order. In offering this advice, the Commission considered factors similar to those used by the SEC when it considers waivers of disqualification under Regulation A and Regulation D, as well as the previous waivers granted by the CFTC and the SEC in prior CFTC actions. Finally, the Commission’s advice is consistent with the guidance provided by the SEC in connection with its issuance of Rule 506, which states that the provision “under which disqualification does not apply if the regulator issuing the relevant order determines that Rule 506 disqualification is not necessary under the circumstances, strikes an appropriate balance,” because “[i]t allows the relevant authorities to determine the impact of their orders and conserves [SEC] Commission resources (which might otherwise be devoted to consideration of waiver applications) in cases where the relevant authority determines that disqualification from Rule 506 offerings is not warranted.” Disqualification of Felons and Other “Bad Actors” From Rule 506 Offerings, 78 FR 44730, 44748 (July 24, 2013, effective Sept. 23, 2013). The CFTC is committed to working together with the SEC on these issues of mutual concern.
In accepting the Bank’s offer, the Commission recognizes DBSI’s cooperation with the Division of Enforcement’s investigation in this matter. The Commission recognizes that DBSI provided important information to the Division that helped the Division undertake its investigation efficiently and effectively. The Commission also recognizes that DBSI commenced significant remedial action to strengthen the internal controls and policies relating to all benchmarks, including ISDAFIX.