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Recent Swap Manipulation Cases

In recent years, the Commodity Futures Trading Commission (CFTC) filed two actions with facts so shocking the reader is forced to ask, ‘can this be how the industry really functions?’

The Complaints

The most recent action was filed in February of 2021 in U.S. District Court in the Southern District of New York (SDNY) against a U.S. dollar swaps trader and managing director of a global investment bank for “engag[ing] in a scheme to deceive and to manipulate the price of U.S. dollar interest rate swap spreads…” 1 The facts of this case are very similar to those of a case filed a little more than a year ago – a bond issuance with a governmental issuer, and the pricing of a related swap through an interdealer broker firm. Both cases illustrate potential flagrant violations of the Commodity Exchange Act (“CEA”) and CFTC regulations.

To take a closer look, in December of 2019, the CFTC filed a complaint in the SDNY against the Head of North American Rates for a global investment bank2 for engaging in “a deceptive scheme to manipulate the prices of U.S. dollar [LIBOR] interest rate basis swaps” in a swap between the bank and a governmental bond issuer. The manipulation took place in June of 2012 when the bank, which was both the joint lead manager of the bond deal and the bank counterparty on the related swap, was pricing the swap for the governmental issuer.

The Objective Pricing Agreement

Prior to swap confirmation, the parties agreed that during the swap pricing call, the rate that appeared on the 19905 screen would be the agreed upon rate for the swap. However, when the swap pricing date grew closer, the head banker became worried that the swap price was going to result in a loss for the bank if the deal were to move forward under the then current market conditions. In order to avoid this, the banker developed a plan with others at the bank and another financial institution.

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