Clarus Proposes Alternative to Swaps Rate Regulators Are Probing

Photographer: Simon Dawson/Bloomberg

The benchmark ISDAfix rate is under investigation by the U.S. Commodity Futures Trading Commission and the U.K.-based Financial Conduct Authority for possible manipulation, FCA head Martin Wheatley said earlier this week. Close

The benchmark ISDAfix rate is under investigation by the U.S. Commodity Futures Trading... Read More

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Photographer: Simon Dawson/Bloomberg

The benchmark ISDAfix rate is under investigation by the U.S. Commodity Futures Trading Commission and the U.K.-based Financial Conduct Authority for possible manipulation, FCA head Martin Wheatley said earlier this week.

Software services company Clarus Financial Technology has proposed an alternative to a benchmark measure of interest-rate swaps that’s based on trades submitted to a derivatives repository.

The so-called SDRfix measure is based on cleared interest-rate swaps denominated in U.S. dollars and euros, Clarus said in a statement yesterday. The benchmark ISDAfix rate is under investigation by the U.S. Commodity Futures Trading Commission and the U.K.-based Financial Conduct Authority for possible manipulation, FCA head Martin Wheatley said earlier this week.

“In our benchmark design and construction work, we have considered how to make the index as transparent and free of conflicts as possible,” Amir Khwaja, chief executive officer of London-based Clarus, said in the statement. “We have also benchmarked how SDRfix performs over a period of time against a comparable index such as ISDAfix.”

CFTC investigators have uncovered evidence that banks reaped millions of dollars in trading profits at the expense of companies and pension funds by manipulating ISDAfix, a person with knowledge of the matter, said in August.

Recorded telephone calls and e-mails reviewed by the CFTC show that traders at Wall Street banks instructed ICAP Plc (IAP) brokers in Jersey City, New Jersey, to buy or sell as many interest-rate swaps as necessary to move ISDAfix to a predetermined level, the person said.

Trading Profits

By rigging the measure, the banks stood to profit on separate derivatives trades they had with clients who were seeking to hedge against moves in interest rates. Banks sought to change the value of the swaps because the ISDAfix rate sets prices for the other derivatives, which are used by firms such as Pacific Investment Management Co., said the person, who asked not to be identified because the details aren’t public.

The 2010 Dodd-Frank Act mandated that all swap transactions be reported to data repositories to provide regulators with a view into the market and to keep track of risks. The SDRfix rate is derived from cleared trades submitted to the data repository owned by the Depository Trust and Clearing Corp. and is calculated each day, Clarus said in the statement.

ISDAfix is determined by a panel of banks daily based on their submissions of the midpoint of their rate swap trades. The measure is used to price options trades on swaps and transactions in the $379 trillion rate swap market.

To contact the reporter on this story: Matthew Leising in New York at mleising@bloomberg.net.

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net.

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