CFTC takes aim at Isdafix manipulation with Barclays case

Barclays has become the first bank to be fined in the long-running investigation into alleged manipulation of US interest rate swap contracts, through a global derivatives benchmark known as Isdafix.

On Wednesday, the US Commodity Futures Trading Commission fined Barclays $115m for attempting to manipulate the benchmark over a five-year period ending in 2012. At that time, the benchmark was owned by the International Swaps and Derivatives Association, an industry trade body.

Isdafix is used by traders to set the prices for interest rate swaps — traded derivatives contracts that can be used to manage potential exposure to interest rate moves. They allow two parties to exchange one stream of interest payments for another, over a set period of time.

Without the Isdafix benchmark, traders would have to call active dealers for price quotes on these swap contracts.

Isdafix was also used to help dealers mark their swaps portfolios and other trades to the market price, for financial reporting purposes. It was established in 1998 by the International Swaps and Derivatives Association and has grown to be the leading industry benchmark.

Isdafix was set based on submissions from a panel of 16 banks, which submitted the rate at which they would buy and sell a benchmark swap with a notional value of $50m, each day before 11am US Eastern time. It provided rates for the euro, Hong Kong dollar, Japanese yen, sterling, the Swiss franc and the US dollar.

Beginning in 2002, ICAP, the UK interdealer broker, collected the US dollar quotes and the rate was calculated by Thomson Reuters, which eliminated the four highest and the four lowest submissions and took the average of the remaining submissions. For all other currencies, Thomson Reuters did both the collection and the calculation of rates.

Barclays was fined by the CFTC in part because its traders made false submissions to the rate setting process.

On Wednesday, the CFTC used several examples to highlight how the benchmark could be manipulated to the bank’s advantage. One related to options settlements from 2008.

A senior Barclays trader told the bank’s broker to buy the spreads in swaps at higher levels. “On this day, Barclays stood to receive more in cash settlements from its counterparties the higher the 10-year US dollar Isdafix,” the CFTC said.

Global regulators began issuing subpoenas to market participants over Isdafix in 2013. As they deepened their investigation, Isda took administration of the US dollar rate away from ICAP in early 2014.

It subsequently awarded control of the benchmark to Intercontinental Exchange, the US derivatives exchange operator that also took over responsibility for administration and surveillance of the Libor bank lending rate.

ICAP and other banks are still being investigated by the CFTC for their role in the alleged rigging of Isdafix.

“ICAP continues to co-operate with information requests and the CFTC’s wider inquiry into this area but as it is ongoing we cannot comment further,” the UK group said in a statement.

Moving oversight of the benchmark to a regulated exchange is in line with global regulatory standards published in July 2013.

The rules were updated to enable regulators to fine traders and institutions for manipulation of benchmarks in several markets, as well as take into account the broader industry trend of trading more interest rate swaps electronically rather than over-the-phone. ICE will change the way the rate is calculated, relying on tradable quotes from execution venues, rather than bank submissions.