Securities Industry Commentator by Bill Singer Esq

Beginning at least as early as January 2007 and continuing through May 2012 (the "Relevant Period"), DBSI, by and through certain of its traders, attempted to manipulate the U.S Dollar International Swaps and Derivatives Association Fix ("USD ISDAFIX," "ISDAFIX," or the "benchmark"), a leading global benchmark referenced in a range of interest rate products, to benefit its derivatives positions, including positions involving cash-settled options on interest rate swaps. 

ISDAFIX rates and spreads are published daily and are meant to indicate the prevailing mid-market rate, at a specific time of day, for the fixed leg of a standard fixed-for-floating interest rate swap.² They are issued in several currencies. USD ISDAFIX rates and spreads are published for various maturities of U.S. Dollar-denominated swaps, including 1-year to 10-years, 15-years, 20-years, and 30-years. The most widely used USD ISDAFIX rates and spreads, and the ones at issue in this Order, are those that are intended to indicate the prevailing market rate as of 11:00 a.m. Eastern Time. The 11:00 a.m. USD ISDAFIX rate is used for the cash settlement of options on interest rate swaps, or swaptions, and as a valuation tool for certain other interest rate products. 

During the Relevant Period, USD ISDAFIX was set each day in a process that began at 11:00 a.m. Eastern Time with the capture and recording of swap rates and spreads from a U.S. based unit of a leading interest rate swaps broking firm ("Swaps Broker"). Swaps Broker disseminated rates and spreads captured in this snapshot as references to a panel of banks. This reference point taken at 11:00 was sometimes referred to as the "fix" or "print" by traders and brokers. These reference rates and spreads (which were calculated using swap spread trade data from Swaps Broker, U.S. Treasuries electronic trade data from Swaps Broker, and Eurodollar futures data at or around 11:00 a.m.) were disseminated by Swaps Broker to the panel banks. The panel banks then made submissions to Swaps Broker. Each bank's submission was supposed to reflect the midpoint of where that dealer would itself offer and bid a swap to a dealer of good credit as of 11:00 a.m. Eastern Time. Most banks on the panel, including DBSI, usually submitted Swaps Broker's reference rates and spreads as captured in the snapshot. As a result, after an averaging of the submissions, the reference rates and spreads became the published USD ISDAFIX almost every day.

However, on certain days in which DBSI had a trading position settling or resetting against the USD ISDAFIX, DBSI attempted to manipulate USD ISDAFIX by making false submissions for DBSI as a panel bank to Swaps Broker, skewing the rates and spreads submitted in the direction that could have moved the USD ISDAFIX setting to benefit the Bank's trading positions. A bank's derivatives trading positions or profitability are not legitimate or permissible factors on which to base submissions in connection with a benchmark. Yet on multiple occasions during the Relevant Period, certain DBSI traders caused DBSI to make USD ISDAFIX submissions higher or lower for the purpose of benefitting positions priced or valued against the benchmark, including swaption and other option positions. On these occasions, DBSI's USD ISDAFIX submissions constituted false, misleading, or knowingly inaccurate reports because they purported to reflect DBSI's honest view of the true costs of entering into a standard fixedfor-floating interest rate swap in particular tenors, but in fact reflected traders' desire to move USD ISDAFIX higher or lower in order to benefit DBSI's positions. These submissions were false, misleading, or knowingly inaccurate because they did not report where DBSI would itself bid or offer interest rate swaps to a dealer of good credit absent a desire to manipulate USD ISDAFIX, but rather reflected prices that were more favorable to the Bank on specific positions. 

In addition to making false submissions, DBSI attempted to manipulate the USD ISDAFIX by bidding, offering, and executing transactions in targeted interest rate products, including swap spreads and U.S. Treasuries at or near the critical 11:00 a.m. fixing time, with the intent to affect the reference rates and spreads captured by Swaps Broker that Swaps Broker disseminated to submitting banks, and thereby to affect the published USD ISDAFIX. Communications of this type involved multiple DBSI traders on more than one DBSI trading desk and spanned several years. 

During the Relevant Period, the Bank had inadequate controls and procedures in place related to the submission process and trading around the 11:00 a.m. fixing. Because of the lack of these controls and procedures, DBSI's traders and DBSI submitters ("Submitters") freely and repeatedly engaged in attempts to manipulate the USD ISDAFIX, which the Bank failed to detect and/or deter. For example, when an attempted manipulation was brought to the attention of supervisors at the Bank overseeing the submission process, no corrective or remedial action was taken.

Footnote 2:  In 2014, the administration of ISDAFIX changed, and a new version of the benchmark is published under a different name by a new administrator using a different methodology

 

• Securities Industry Commentator. Bill Singer