Swap Dealer and Employee Settle CFTC Charges for Mismarking Swap Positions

A French swap dealer and its former employee settled CFTC charges for mismarking swap positions to inflate profits and minimize losses or to "smooth out returns."

According to the settlement Orders, the CFTC found that the bank employee mismarked interest rate positions by submitting entries as to the end-of-day USD LIBOR forward curve that were at odds with observable mid-market prices. The CFTC found that the employee utilized knowledge of the limits of the internal controls designed to detect mismarking to keep the curve within the acceptable range. The mismarking resulted in the desk overstating its profits by approximately $25 million.

The CFTC found that the bank failed to diligently supervise the activities of the trading desk and to maintain internal controls that would have detected the misconduct.

The CFTC determined that the employee violated anti-manipulation requirements in CEA Section 6(c)(1) ("Prohibition regarding manipulation and false information") and CFTC Regulation 180.1(a)("Prohibition on the employment, or attempted employment, of manipulative and deceptive devices"). The CFTC also determined that the swap dealer failed to diligently supervise and violated a series of swap dealer rules resulting from the mismarked positions (including those relating to records, variation margin, daily marks and trade reporting).

To settle the charges, the employee agreed to, among other things, a fine of $250,000 and a three-year bar on various commodity interest activities. The bank agreed to a fine of $2,800,000 and committed to various undertakings to address the conduct at issue.

CFTC Commissioner Kristin N. Johnson issued a statement in support of the enforcement action, saying that actions like this "reinforce ongoing concerns over the internal and external reporting of rigged data and further highlight the importance of benchmark reform initiatives."