Regulatory and enforcement actions taken this week:
CFTC charges ICAP Europe with manipulation and attempted manipulation of yen Libor, ordered to pay $65 million
The U.S. Commodity Futures Trading Commission (CFTC) issued an order against ICAP Europe Ltd., an interdealer broker, bringing and settling charges of manipulation, attempted manipulation, false reporting, and aiding and abetting derivatives traders’ manipulation and attempted manipulation, relating to the London Interbank Offered Rate (LIBOR) for the Japanese yen. LIBOR is a critical benchmark interest rate used throughout the world as the basis for trillions of dollars of transactions. ICAP is a subsidiary of U.K.-based ICAP plc.
The CFTC found that for more than four years, from at least October 2006 through at least January 2011, ICAP brokers on its yen derivatives and cash desks knowingly disseminated false and misleading information concerning yen borrowing rates to market participants in attempts to manipulate, at times successfully, the official fixing of the daily yen LIBOR. ICAP brokers, including one known as “Lord LIBOR” or “Mr. LIBOR,” did so to aid and abet their highly valued client, who was a senior yen derivatives trader employed at UBS Securities Japan Co., Ltd. and later at another bank, in his relentless attempts to manipulate yen LIBOR to benefit his derivatives trading positions tied to this benchmark. On limited occasions, ICAP yen brokers engaged in this unlawful conduct to benefit other derivatives traders as well.
The order requires ICAP, among other things, to pay a $65 million civil monetary penalty, and cease and desist from further violations as charged. Pursuant to the order, ICAP and ICAP plc also agree to take specified steps to ensure the integrity and reliability of benchmark interest rate-related market information disseminated by ICAP and certain other ICAP plc companies.
“ICAP and other interdealer brokers are expected to be honest middlemen,” said David Meister, the CFTC’s Director of Enforcement. “Here, certain ICAP brokers were anything but honest. They repeatedly abused their trusted role when they infected the financial markets with false information to aid their top client’s manipulation of LIBOR. As should be clear from today’s action, any market participant who seeks to undermine the integrity of a global benchmark interest rate must be held accountable.”
Yen LIBOR is fixed daily based on rates contributed by panel banks for yen LIBOR that are supposed to reflect each bank’s assessment of costs of borrowing unsecured funds in the London interbank market. ICAP, as an interdealer broker, intermediates cash and LIBOR-based derivatives transactions between banks and other institutions. As a service to clients and to solicit and maintain business, ICAP also provides banks with market insight, including projections of likely LIBOR fixings, which are implicitly represented as ICAP’s unbiased assessment of borrowing costs and market pricing based on objective, observable data, some of which was uniquely in ICAP’s possession.
According to the CFTC, the UBS senior yen trader called on ICAP yen brokers more than 400 times for assistance in manipulating yen LIBOR. ICAP brokers often accommodated the requests by issuing, via a yen cash broker, group emails to panel banks and others containing “Suggested LIBORs” for yen LIBOR. But rather than providing an honest and objective assessment of how yen LIBOR would fix, the suggested LIBORs reflected the preferred rates that would benefit the senior yen trader.
The order finds that almost all of the yen LIBOR panel banks received the suggested LIBORs, and several relied on them in making their yen LIBOR submissions, particularly during the financial crisis of 2007-2009. Even panel banks that tried to make truthful yen LIBOR submissions may have passed on false or misleading submissions, because they used ICAP brokers’ purportedly unbiased suggested LIBORs to inform their LIBOR submissions.
According to the order, the ICAP brokers referred to the panel bank submitters as “sheep” when they copied the yen cash broker’s suggested LIBORS. In fact, the order finds that at least two banks’ submissions mirrored the suggested LIBORs up to 90% of the time.
The order further finds that the ICAP yen bokers provided these “LIBOR services” to keep the senior yen trader’s business, which accounted for as much as 20% of the yen derivatives desk’s revenue. “Mr. LIBOR,” the yen cash broker who disseminated the false suggested LIBORs, demanded compensation from the yen derivatives desk for his “LIBOR services” or “no more mr libor.” This grew from dinners and champagne, to additional commission-generating trades, to “kick backs” totaling $72,000.
The order further finds that this unlawful, manipulative conduct continued for more than four years, in part because ICAP’s supervision, internal controls, policies and procedures were inadequate. For example, ICAP never audited the yen derivatives desk and left compliance oversight to the yen derivatives desk head, who was complicit in the misconduct.
With this Order, the CFTC has now imposed penalties of just under $1.3 billion on entities for manipulative conduct with respect to LIBOR submissions and other benchmark interest rates. See In the Matter of The Royal Bank of Scotland plc and RBS Securities Japan Limited, Order Instituting Proceedings Pursuant To Sections 6(c) And 6(d) Of The Commodity Exchange Act, Making Findings And Imposing Remedial Sanctions (February 6, 2013) ($325 Million penalty) (see CFTC Press Release 6510-13); In the Matter of UBS AG and UBS Securities Japan Co., Ltd., Order Instituting Proceedings Pursuant To Sections 6(c) And 6(d) Of The Commodity Exchange Act, Making Findings And Imposing Remedial Sanctions (December 19, 2012) ($700 Million penalty) (see CFTC Press Release 6472-12); and In the Matter of Barclays PLC, Barclays Bank PLC, and Barclays Capital Inc., Order Instituting Proceedings Pursuant To Sections 6(c) And 6(d) Of The Commodity Exchange Act, As Amended, Making Findings And Imposing Remedial Sanctions (June 27, 2012) ($200 million penalty) (see CFTC Press Release 6289-13). In the actions against the panel banks, the CFTC Orders also require the banks to comply with undertakings specifying the factors upon which benchmark interest rate submissions should be made, and requiring implementation of internal controls and policies needed to ensure the integrity and reliability of such communications.
CFTC orders Vision Financial Markets to Pay a $525,000 for violations of customer fund segregation requirements
The CFTC filed and simultaneously settled charges against Vision Financial Markets LLC, for failing to segregate commodity and options customer funds, failing to notify the CFTC and Vision’s designated self-regulatory organization (DSRO) of its under-segregation, and making misstatements to the CFTC about the location and manner in which the customer funds were being held. Vision is registered with the CFTC as a futures commission merchant (FCM) and with the SEC as a broker-dealer.
The CFTC requires Vision to pay a $525,000 civil monetary penalty and cease and desist from violating the CEA and Regulations, as charged.
The CFTC found that Vision, after using commodity futures and options customer funds to purchase securities, failed to account for and hold those securities separately for its customers. Instead, between approximately August 2008 and June 2009, Vision commingled the securities with its own funds and the funds of its securities customers in Vision’s participant account held in its own name at the Depository Trust Company (DTC). Vision represented to the CFTC that the securities were “deposited in segregated funds bank accounts,” when, in fact, certain Vision personnel involved with preparing and submitting the monthly segregation statements knew that the assets were not held at a bank but actually were held in Vision’s account at DTC and were commingled with funds of Vision and others.
The CFTC also found that after Vision’s segregation violations and misstatements were uncovered in June 2009, Vision restated its monthly segregation statements, deducting the value of the customer funds held in the DTC account from its calculation of total segregated funds. From December 2008 through May 2009, when Vision had invested larger amounts of customer funds in securities, excluding their value from Vision’s calculation of total funds in segregation put Vision in a position of under-segregation for a six month period. However, during that period, Vision did not notify the CFTC or its DSRO that it was under-segregated, the CFTC found.
Separately, the CFTC filed and and simultaneously settled charges against Vision Financial Markets for failing to diligently supervise by failing to aggregate a customer’s multiple accounts, failing to use the proper delta, and utilizing a faulty software program in calculating the customer’s net position. The CFTC requires Vision to pay a civil monetary penalty of $140,000 and to cease and desist from violating the CFTC’s Regulation 166.3.
The CFTC found that in May 2012, Vision failed to diligently supervise its employees in the handling of a customer’s commodity interest accounts. Specifically, the CFTC found that Vision failed to aggregate a customer’s multiple trading accounts held at Vision when calculating that customer’s feeder cattle futures speculative positions traded on the CME and that Vision failed to use the proper delta in calculating this customer’s aggregate futures equivalent net positions. The order further finds that Vision relied on a faulty back-office software program, which incorrectly calculated aggregate futures equivalent net positions and which was used to identify potential speculative limit violations for all of its customer accounts. The software program was not corrected until six months after Vision discovered the software program’s calculation error, according to the CFTC.
CFTC charges The Yorkshire Group and Scott Platto with engaging in illegal, off-exchange precious metals transactions
The CFTC filed a civil injunctive enforcement action in the U.S. District Court for the Eastern District of New York against defendants The Yorkshire Group Inc. of Staten Island, N.Y, and its sole owner, Scott Platto, also of Staten Island.The CFTC complaint, filed on Sept. 25, 2013, charges the defendants with engaging in illegal, off-exchange financed transactions in precious metals with retail customers. The complaint further alleges that Platto, as the owner, operator, and controlling person of Yorkshire, is liable for Yorkshire’s violations of the Commodity Exchange Act (CEA).