Citigroup to Pay $425 Million to Settle Benchmark Rigging Allegations

Updated on
  • Bank pays $425 million to settle manipulation allegations
  • One Citigroup trader was ‘very proud’ of efforts to cheat

The smiley face said it all. It was October 2008 and a Citigroup Inc. trader was describing how easy it was to manipulate a key financial benchmark.

The trader wrote that ISDAfix, as the benchmark is known, is “surprising[ly] easy to push! [I] think last week, [I] pushed it 3bps from 10:55 to 11:05 :)” according to messages cited by the U.S. government Wednesday.

Now that smile has turned upside down: Citigroup is paying $425 million to resolve U.S. Commodity Futures Trading Commission claims that it tried to rig several interest-rate benchmarks from 2007 to 2012. The New York-based bank neither admitted to nor denied the allegations, which concern ISDAfix and benchmarks in London and Tokyo. The alleged ISDAfix violations generated the majority of the penalty, $250 million.

Though arcane, ISDAfix plays an important role in global financial markets, helping determine the value of interest-rate swaps. And Citigroup’s actions spread to Treasuries, according to the government. Traders at the bank bought and sold U.S. government debt -- one of the world’s most important markets -- to try to improperly influence ISDAfix, the CFTC said.

To buttress its case, the CFTC cited electronic communications from traders at Citibank, the division where the alleged misdeeds took place. The traders discussed how they moved the benchmark around 11 a.m. New York time, when ISDAfix’s value is set. One trader boasting of being “very proud” of the ability to move the benchmark, according to documents released by the CFTC.

For a QuickTake explainer on benchmark manipulation, click here.

The case demonstrates that “we will vigorously continue to investigate any efforts to manipulate financial benchmarks, and we will take action where possible to protect the integrity of these benchmarks,” said Aitan Goelman, the CFTC’s director of enforcement.

“These settlements represent a significant step for Citi in resolving its legacy benchmark rate investigations,” Danielle Romero-Apsilos, a Citigroup spokeswoman, wrote in an e-mailed statement. “We continue to fully cooperate with pending investigations conducted by other agencies related to benchmark rate submissions.”

To avoid future misconduct, Citigroup has bolstered its surveillance of electronic and oral communications, including “measures designed to detect communications suggesting possible manipulation of benchmark rates,” according to the CFTC.

The cases resolved Wednesday also involved Libor. While the Justice Department has brought criminal cases against five banks for Libor manipulation, prosecutors told Citigroup that it wouldn’t be charged, the bank said in a May 2015 regulatory filing. The CFTC’s fine stemmed from a civil case. Even after the regulator contacted the bank over its Libor submissions, the bank continued to manipulate the benchmark, according to the CFTC.

The Department of Justice has concluded its criminal investigation of Citigroup and another bank, Barclays Plc, for ISDAfix infractions, and doesn’t plan to file charges, according to a person familiar with the matter.

The CFTC said Citigroup’s “cooperation was not sufficient” at the start of the investigation. The bank turned over records slowly, and initially said “certain misconduct did not occur at the bank,” according to the CFTC. After dragging its heels, Citigroup “discovered and produced evidence showing that the bank’s initial statements about certain misconduct were incorrect.”

Citigroup traders were aware that others in the market attempted to manipulate the ISDAfix rate by placing trades just before 11 a.m., according to the CFTC complaint. A June 2007 e-mail said “there [is] a bit of gaming that goes on,” to which a second trader responded “people are always messing with the screen at that time.”

And it wasn’t just traders who noticed. A Citigroup customer complained of seeing one set of values for ISDAfix throughout the day, and then a separate value right at the 11 a.m. fixing time. “[I]’ve brought this up to several people over the last few months because the fix seems to go against us most of the time,” wrote the customer, who wasn’t named by the CFTC. “[E]ach person tells me that there is no manipulation by the traders; however, the coincidence of us losing on every one but one fixing ... is starting to get old,” according to the complaint.

ISDAfix might not be a household word, but its impact on global markets is huge: The benchmark helps settle trades in the $289 trillion market for interest-rate swaps and the $49 trillion market for options on swaps. Banks use it to set coupons paid for bonds tied to commercial real estate. Fluctuations in ISDAfix help determine the performance of structured notes bought by wealthy individuals and the amounts some states pay on pension annuities.

Barclays was the first bank to settle CFTC allegations tied to ISDAfix, agreeing to pay $115 million last year. It wasn’t just Barclays, a person familiar with the investigation said in 2013. Wall Street’s largest dealers sought to change the value of the swaps because the ISDAfix rate sets prices for the other derivatives, known as swaptions, which are used by investment firms, a person familiar with the investigation said in 2013.

ICAP Plc’s rates brokering desk in Jersey City, New Jersey, was central to how the ISDAfix rate was set. Nicknamed “Treasure Island” for how well the brokers were paid, it collected the bank submissions that were used to set the U.S. dollar ISDAfix. Some Citigroup traders, however, didn’t seem too impressed with the ICAP services, and said they avoided trading through ICAP “unless they wanted to move the market,” the complaint said.

A 2008 instant message from a Citigroup trader referred to the broker as “icrap” while another said “I genu[ine]ely think people are stupid” who look at ICAP’s electronic prices.

Guy Taylor, an ICAP spokesman, declined to comment on the characterizations in the CFTC complaint.

In the summer of 2010, Citigroup traders e-mailed a news story among themselves about the possibility that ISDAfix could be manipulated around the 11 a.m. calculations. “GAME OVER” and “ouch...” were among the written reactions, the CFTC said. One trader said: “oh jesus do I want to read this?”

Bloomberg News, citing a person with knowledge of the matter, in 2013 was the first to report that the CFTC found evidence traders at Wall Street banks instructed ICAP brokers to buy or sell as many interest-rate swaps as necessary to rig ISDAfix by moving it to a predetermined level. Doing so helped banks reap millions of dollars in trading profits, costing companies and pension funds, the person said at the time.

— With assistance by Dakin Campbell, and Tom Schoenberg

(Adds 10th paragraph on DOJ concluding a criminal investigation of Citigroup and Barclays for ISDAfix infractions.)
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