CFTC looks into possible price manipulation of interest-rate swaps


CFTC Said to Subpoena ICAP Brokers, Dealers on Swap Prices

By Matthew Leising
Bloomberg News
Monday, April 8, 2013

NEW YORK -- The Commodity Futures Trading Commission has issued subpoenas to ICAP Plc brokers and as many as 15 Wall Street banks as part of an investigation into possible price manipulation of benchmark interest-rate swaps, according to people familiar with the matter.

The CFTC plans to interview about a dozen current and former brokers at ICAP's Jersey City, New Jersey, office as well as dealers that contribute prices used to set the daily ISDAfix swap rates, said three of the people, who asked not to be named because the matter is private. The regulator is probing whether ICAP brokers are colluding with dealers who stand to profit from inaccurate quotes, including failing to update published market prices after trades occur, one of the people said.

The ISDAfix levels, which the Federal Reserve includes in a daily report on money-market rates, are used by everyone from corporate treasurers to money managers to determine borrowing costs and to value much of the $379 trillion of outstanding interest-rate swaps globally.

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The ISDAfix levels, which the Federal Reserve includes in a daily report on money-market rates, are used by everyone from corporate treasurers to money managers to determine borrowing costs and to value much of the $379 trillion of outstanding interest-rate swaps globally.

The CFTC is probing the swaps trading as it works with European regulators in the rate-rigging scandal surrounding the London interbank offered rate. ICAP brokers in London have passed on requests from dealers asking rate-setters at rival banks to make favorable submissions, e-mails released as part of the European probe show. UBS AG, Royal Bank of Scotland Group Plc, and Barclays Plc have paid $2.6 billion in fines for rigging Libor rates.

Stephanie Allen, a CFTC spokeswoman, said the commission doesn’t comment on enforcement issues. Brigitte Trafford, an ICAP spokeswoman, declined to comment.

ICAP, the biggest broker of interest-rate swaps between banks, is paid commissions based on the size of the trades it matches. The firm's rate-swap desk in Jersey City is nicknamed "Treasure Island" because of the size of those commissions, according to three people familiar with the matter. On average, $1.4 trillion of transactions were traded daily on ICAP's systems in 2012, the company said in its annual report.

Like Libor, which is the rate at which banks say they would lend to each other, ISDAfix is derived from a process where 15 banks submit bids and offers for swaps in various currencies and denominations, according to the website of the International Swaps and Derivatives Association, which created the rate in 1998 with the predecessors of Thomson Reuters Corp. and ICAP.

The rates are distributed by Reuters, Telekurs, and Bloomberg LP, the parent company of Bloomberg News, according to the ISDA website.

Rate swaps, which investors and companies use to exchange fixed- and floating-rate obligations, involve a series of payments that are determined by rising or falling interest costs over the lifetime of the contract. They last as many as 30 years and are denominated in notional amounts that are used to calculate payments and don’t represent money that has changed hands.

The ISDAfix rate and intraday trading levels that ICAP displays on an electronic screen known as 19901 are used by corporate treasurers, asset managers and other market participants as a measure of wholesale funding costs.

About 6,000 companies and financial firms subscribe to the pricing service, according to ICAP. Values published by it are accepted as a legal price by which swaps traders can terminate contracts or to mark the value of positions, according to ISDA.

One potential source of price manipulation being probed by the CFTC is tied to ICAP brokers not updating the rate-swap price on the 19901 screen after they facilitate a trade between two banks, according to one of the people and a former ICAP broker in the Jersey City rate-swaps group who asked not to be identified for fear of retribution.

ICAP enters those prices manually onto the screen, and dealers tell the brokers not to put trades into the system until all their business in a transaction is done, which skews current market prices, according to the former broker, who said he witnessed such activity first-hand.

The contributors to ISDAfix are Bank of America Corp., Barclays, BNP Paribas SA, Citigroup Inc., Credit Suisse AG, Deutsche Bank AG, Goldman Sachs Group Inc., HSBC Holdings Plc, JPMorgan Chase & Co., Mizuho Financial Group Inc., Morgan Stanley, Nomura Holdings Inc., Royal Bank of Scotland, UBS, and Wells Fargo & Co., according to ISDA.

Representatives at the banks declined to comment.

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