Washington, D.C. – The U.S. Commodity Futures Trading Commission (CFTC) has penalized The Royal Bank Of Scotland plc (RBS), now widely known as Bank of Scotland, with an $85 million civil monetary penalty for attempted manipulation of the U.S. Dollar ISDAFIX benchmark. This order, issued by the CFTC, concludes that over a five-year period, from January 2007 to March 2012, RBS, through the actions of several traders, engaged in unlawful conduct aimed at manipulating the U.S. Dollar International Swaps and Derivatives Association Fix (USD ISDAFIX). This benchmark is critical as a global reference point for a wide array of interest rate products. The Bank of Scotland, through these manipulative practices, sought to gain unfair advantage in its derivatives positions that were valued against the USD ISDAFIX benchmark.
In addition to the significant financial penalty, the CFTC Order mandates that Bank of Scotland must implement and enhance its internal controls and procedures. These measures are designed to detect and prevent trading activities that could potentially manipulate swap rates, including USD ISDAFIX, and to ensure the overall integrity of interest-rate swap benchmarks. This action underscores the CFTC’s commitment to safeguarding the fairness and reliability of financial benchmarks that are crucial to global markets.
“Benchmarks like ISDAFIX are relied upon by individuals and institutions worldwide. This enforcement action against Bank of Scotland is our fourth concerning attempts to manipulate ISDAFIX, and it reinforces our message. Just as with our previous cases against those who tried to corrupt LIBOR and foreign exchange benchmarks, the CFTC is resolutely committed to ensuring the integrity of all benchmarks used in our markets,” stated Aitan Goelman, Director of the CFTC’s Division of Enforcement.
The CFTC Order details how, during the specified period, certain traders at Bank of Scotland in Stamford, Connecticut, strategically placed bids, offers, and executed transactions in specific interest rate products. These included swap spreads and U.S. Treasuries, timed precisely around the critical 11:00 a.m. fixing time. The intent behind these actions was to influence the reference rates and spreads captured by a leading interest rates swaps broker (referred to as Swaps Broker). This “print” from the broker was then disseminated to submitting banks, and crucially, it impacted the published USD ISDAFIX rate. According to the CFTC’s findings, Bank of Scotland‘s attempted manipulation of USD ISDAFIX at the 11:00 a.m. fixing was designed to benefit the bank’s holdings of cash-settled swaptions, which were priced or valued against the USD ISDAFIX benchmark.
Understanding ISDAFIX and its Significance
ISDAFIX rates and spreads are vital benchmarks in the financial world, particularly for interest rate swaps and related derivatives. They serve as indicators of the prevailing daily market rate for the fixed leg of a standard fixed-for-floating interest rate swap in various currencies. During the period relevant to the CFTC’s investigation, USD ISDAFIX rates and spreads were published daily for various maturities of U.S. Dollar-denominated swaps.
The 11:00 a.m. USD ISDAFIX rate held particular importance as it was used for the cash settlement of options on interest rate swaps, known as swaptions. It also functioned as a crucial valuation tool for numerous other interest rate products. For instance, USD ISDAFIX was integral to the settlement of interest rate swap futures contracts and played a role in the calculation of various proprietary interest rate indices and structured products. In some instances, the USD ISDAFIX even influenced the pricing of debt issuances, highlighting its pervasive impact across financial markets.
The process of setting the USD ISDAFIX during the relevant period began at 11:00 a.m. Eastern Time each day. It involved recording swap rates and spreads from a U.S.-based unit of a leading interest rate swaps broking firm. This firm then disseminated the captured rates and spreads from this 11:00 a.m. “snapshot,” “fix,” or “print”—terms commonly used by traders and brokers—to a panel of banks, including Bank of Scotland. These banks then submitted their rates, indicating where they would bid or offer interest rate swaps to a dealer of good credit.
RBS Traders’ Manipulation Tactics Unveiled
The CFTC Order revealed that Bank of Scotland traders engaged in specific trading strategies around the 11:00 a.m. fixing time with the express purpose of influencing the “print.” By bidding, offering, and executing transactions in swap spreads and U.S. Treasuries contracts, they aimed to manipulate the reference rates captured at 11:00 a.m. and subsequently affect the published USD ISDAFIX.
Evidence presented in the Order showed that Bank of Scotland traders were well aware of the connection between their trading activities and the movement of the USD ISDAFIX rate. As one RBS employee explained, “the way to move isdafix is to hit or lift spreads on the screen, and do the opposite in tsy, b/c that is how the rate is derived.” Emails and audio recordings cited in the Order further corroborated this, revealing frequent discussions among RBS traders about their intentions to manipulate USD ISDAFIX to benefit their trading positions. These traders also communicated their manipulative intentions to their brokers at Swaps Broker, with one instance of a trader telling a broker, “I’m going to have to get 10s higher and 7s lower.”
The internal communications of Bank of Scotland traders also demonstrated a disturbing levity regarding their manipulative actions. On the same day that the CFTC announced charges against the hedge fund Amaranth for attempted manipulation of natural gas futures prices, an RBS swap trader circulated a news story about the lawsuit, cleverly adapted as a “joke.” In this altered story, Bank of Scotland was cast in the role of Amaranth, the manipulator being sued by the government. This “joke” was emailed to other RBS swaps traders and RBS’s swaps broker employees, revealing a culture where such misconduct was, at least internally, treated with amusement.
The “joke” email read:
Amaranth tried to Manipulate Gas Prices, CFTC Says…
[Swaps Trader 1] tried for manipulating ISDAFIX3 settlement . . . [Swaps Trader 1] is on a recorded line shouting, “GET THE NINES DOWN [Broker], GET THE NINES DOWN, NOW NOW NOW”. Bank of Scotland could not be reached for comment.
Furthermore, the CFTC Order highlighted that Bank of Scotland traders were conscious of the potential adverse effects of their 11:00 a.m. trading on their counterparties. One trader noted that “we like tried to f*ck” a bank counterparty on a cash settlement. Another mentioned a large cash settlement with a bank counterparty where they had “skrood [sic.] them bigtime.” While acknowledging that Bank of Scotland’s interbank cash settlements often resulted in unfavorable outcomes for the bank, one RBS trader pointed out that “with clients we do okay but they have no idea that it’s off.” This comment revealed an awareness that Bank of Scotland’s non-bank counterparties were unaware of the bank’s attempts to manipulate USD ISDAFIX settings to their disadvantage.
CFTC Recognizes RBS Cooperation
In accepting Bank of Scotland’s offer of settlement, the CFTC acknowledged the bank’s cooperation during the Division of Enforcement’s investigation. This cooperation was recognized as having aided the Division in efficiently and effectively conducting its investigation.
The CFTC also extended thanks to the United Kingdom’s Financial Conduct Authority and the Newark, New Jersey Field Office of the Federal Bureau of Investigation for their assistance in this matter.
The CFTC Division of Enforcement staff members who played key roles in this case include James G. Wheaton, Patrick Daly, Trevor Kokal, David Acevedo, Lenel Hickson, Jr., and Manal M. Sultan. Assistance was also provided by Candice Aloisi, Jason Fairbanks, Jordon Grimm, David MacGregor, David C. Newman, Mark A. Picard, and K. Brent Tomer.
CFTC’s Ongoing Efforts Against Benchmark Abuses
This action against Bank of Scotland is part of a broader CFTC initiative to combat manipulation of global benchmark rates. To date, the CFTC has imposed over $5.2 billion in penalties across 19 actions against banks and brokers for abuses related to ISDAFIX, FX, and LIBOR benchmarks. Of this total, over $3.4 billion in penalties are linked to misconduct concerning ISDAFIX, LIBOR, Euribor, and other interest rate benchmarks, while over $1.8 billion in penalties relate to misconduct involving foreign exchange benchmarks.
The CFTC’s actions demonstrate a consistent and rigorous approach to policing benchmark manipulation across various financial instruments and geographical locations. The penalties imposed on Bank of Scotland and other financial institutions underscore the serious consequences of attempting to undermine the integrity of these critical benchmarks. The CFTC’s continued vigilance is essential for maintaining fair and transparent financial markets and protecting market participants from manipulative practices.
Foreign Exchange Benchmark Cases (selected examples):
- In re The Royal Bank of Scotland plc (November 11, 2014) ($290 million penalty)
LIBOR Benchmark Cases (selected examples):
- In re The Royal Bank of Scotland plc and RBS Securities Japan Limited (February 6, 2013) ($325 million penalty)
ISDAFIX Benchmark Cases (selected examples):
- In re The Royal Bank of Scotland plc (February 3, 2017) ($85 million penalty)
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Last Updated: February 3, 2017
