CFTC orders Bank of America to pay $30 million penalty
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 brokering firm (Swaps Broker).
ISDAFIX rates and spreads were published daily and were 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 were issued in several currencies and were 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, were those that were intended to indicate the prevailing market rate as of 11:00 a.m. Eastern Time. The 11:00 a.m. USD ISDAFIX rate was 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 Bank of America traders understood and employed two primary means in their attempts to manipulate USD ISDAFIX rates, each with the goal of moving USD ISDAFIX in the direction that favored Bank of America on specific trading positions at the expense of its counterparties.
The Bank attempted to manipulate USD ISDAFIX by bidding, offering, or trading swap spreads and U.S. Treasuries at and around 11:00 a.m. to affect rates and thereby increase or decrease the Swaps Broker’s reference rates and spreads and influence the final published USD ISDAFIX; and by making false, misleading, or knowingly inaccurate submissions to Swaps Broker concerning swap rates and spreads.
According to the Order, on occasion, certain traders at Bank of America attempted to manipulate 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, with the intent to affect the reference rates and spreads captured by Swaps Broker that Swaps Broker disseminated to panel banks, and thereby to affect the published USD ISDAFIX.
Bank of America traders placed these bids or offers or executed trades in the moments leading into 11:00 a.m. designed in a manner, including timing and pricing, to increase or decrease the price level of swap spreads and/or U.S. Treasuries, with the intent to affect levels reported on the electronic screen known as the “19901 screen” and USDAFIX fixings.
As one Bank of America trader explained to another in an electronic communication, “pushing the rate higher basically means we rcv a higher rate at the fixing.”
he Order also finds that certain Bank of America traders directed the relevant Bank of America Swaps Desk middle office employee responsible for making USD ISDAFIX submissions (the Submitter) to submit rates and spreads higher or lower than the Submitter otherwise would submit to attempt to affect the final published USD ISDAFIX rates and spreads to benefit the Bank’s positions.
On these occasions, Bank of America’s USD ISDAFIX submissions constituted false, misleading, or knowingly inaccurate reports because they purported to reflect the Bank’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 Bank of America’s positions.
For example, on one quarterly expiration date for swap futures contracts, a Bank of America trader told the Submitter that he was “gonna need 5y7y10y and 30y rates and spreads at 11am,” noting that he “want[ed] them low.” The trader later instructed the Submitter to “put each of them lower by like 2/10,” and the Submitter complied with the trader’s request. ■