French bank accepts penalty for benchmark manipulation, the seventh USD Isdafix enforcement action

BNP Paribas Securities has accepted the penalty imposed by the Commodity Futures Trading Commission (CFTC) to settle charges for attempted manipulation of the Isdafix benchmark. The regulator ordered the bank to pay a US$90m civil monetary penalty.

"We accept the fine of US$90m imposed by the CFTC and are pleased to have resolved this investigation regarding past conduct," said a BNP Paribas spokesperson, in an emailed statement, adding that settlement with the CFTC will have no impact on the bank's ability to serve its clients. The fine amount is covered by existing provisions.

The CFTC found that over a five-year period, between 2007 and 2012, BNP Paribas attempted to manipulate the US Dollar International Swaps and Derivatives Association Fix (USD Isdafix), which is used on a range of interest rate products, to benefit BNP Paribas's derivatives positions in instruments such as cash-settled options on interest rate swaps and certain exotic structured products.

There are over one million products linked to FX rate underlyings, including 356 structured notes featuring different Ice Swap Rate indices (formerly known as the Isdafix) including the 10-year euro Ice, 10-year UK sterling, 30-, 10- and two-year Ice swap rate, according to SRP data.

BNP Paribas's unlawful conduct involved multiple traders and included supervisors, according to the CFTC. 'This matter, the seventh enforcement action relating to the USD Isdafix benchmark, further demonstrates that the CFTC will continue to be vigilant and aggressive in protecting the integrity of our markets,' said James McDonald (pictured), CFTC director of enforcement. 'We won't stop until all wrongdoers are held accountable-no matter how broadly the misconduct stretches across the industry.'

According to the watchdog, BNP Paribas, through its traders, bid, offered, and executed transactions in interest rate swap spreads in a manner deliberately designed-in timing, price, and other respects-to influence the published USD Isdafix in order to benefit the bank in its derivatives positions. In addition, BNP Paribas' employees making USD Isdafix submissions also attempted to manipulate and made false reports concerning the benchmark by skewing the submissions in order to benefit BNP Paribas at the expense of its derivatives counterparties and clients.

Print manipulation
According to the CFTC, BNP Paribas' traders recognized that "11am print manipulation" could present both risks and opportunities for the bank, including for sophisticated exotics positions that the options desk held, such as correlation and volatility swaps.

Certain BNPP traders described such attempts to manipulate the USD Isdafix as ways to "play the fixing," "push the screen," and "play the screen game." The regulator found that the communications among the bank's traders became explicit. On one occasion, BNP Paribas' options and swaps traders likened their illegal efforts to manipulate the USD Isdafix to lyrics of popular songs by Montell Jordan and Salt-N-Pepa, according to the CFTC order.

To complement these manipulative efforts on certain occasions during the relevant period BNP Paribas traders attempted to manipulate the benchmark by making submissions higher or lower for the purpose of benefitting derivative positions priced or valued against the benchmark. The CFTC describes multiple examples of these strategies for attempted manipulation and false reporting by BNP Paribas traders during the relevant period.

In addition to the US$90m penalty, the CFTC also required BNP Paribas to cease and desist from further violations as charged, and take specified remedial steps, including measures to detect and deter trading intended to manipulate swap rates such as the USD Isdafix, to ensure the integrity and reliability of the bank's benchmark submissions, and to improve related internal controls.

"Since the time period described in the settlement, BNP Paribas has proactively strengthened its compliance and controls, as well as made significant changes to its business model as part of the bank's remediation efforts," said the BNP Paribas spokesperson. "BNP Paribas operates under the highest professional standards of conduct and prides itself on being a responsible and ethical business partner. CFTC has acknowledged BNP Paribas's efforts as well as our significant cooperation with its investigation."

The CFTC penalty follows an announcement by the United States District Court for the Southern District of New York concerning a proposed settlement reached (Alaska Electrical Pension Fund, et al. v. Bank of America, N.A., et al.) between settlement class members and five defendants including BNP Paribas, ICAP Capital Markets, Morgan Stanley, Nomura Securities International, and Wells Fargo Bank which are required to pay US$96m.

The lawsuit alleges that the defendants engaged in anticompetitive acts that affected the market for Isdafix Instruments.

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