Rate Benchmark Scandal Hits $570 Million in Fines as RBS Settles

  • RBS joins Barclays, Citigroup and Goldman Sachs in settlements
  • CFTC order also details attempted rigging of U.S. Treasuries

Royal Bank of Scotland Plc agreed to pay $85 million to settle allegations it attempted to manipulate the ISDAfix interest-rate benchmark that’s tied to the $544 trillion private derivatives market, the U.S. Commodity Futures Trading Commission said.

That brings total fines so far for attempted manipulation of ISDAfix to $570 million as RBS joins Barclays Plc, Citigroup Inc. and Goldman Sachs Group Inc. in settling CFTC cases. Though arcane, ISDAfix plays an important role in global financial markets, helping determine the value of interest-rate swaps, securitized bonds and options on swap contracts. The cases have also included attempted manipulation of Treasuries because the price of U.S. debt influenced the daily calculation of ISDAfix.

To buttress its case, the CFTC cited electronic communications from traders at RBS, who discussed how they moved the benchmark around 11 a.m. New York time, when ISDAfix’s value was set. “As one RBS employee explained, ‘the way to move isdafix is to hit or lift spreads on the screen, and do the opposite in tsy, b/c that is how the rate is derived,’” the CFTC said in its statement Friday. “Tsy” is shorthand for U.S. Treasuries.

RBS neither admitted to nor denied the allegations. “This is an example of past misconduct that has no place at RBS and we strongly condemn these actions,” Ross McEwan, RBS chief executive officer, said in an e-mailed statement. “These findings make for uncomfortable reading and we have already taken significant steps to make sure this kind of behavior cannot happen again. The culture and structure of RBS has changed dramatically in recent years; I’m pleased we can put this issue behind us and concentrate on the important job of building a bank that is fully focused on the best interests of its customers.”

All of the CFTC cases related to ISDAfix have been for attempted manipulation, as the regulator hasn’t shown that banks and brokers actually changed the rate through their trading.

Read more: Behind the scenes of the first ISDAfix settlement, at Barclays

ISDAfix might not be a household word, but its impact on global markets is huge: The benchmark helps settle trades in the $311 trillion market for interest-rate swaps and the $35 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.

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. ISDAfix sets the price on an expiring swaption contract, so moving the rate even a tiny amount can save a bank millions of dollars.

Another RBS trader joked about the attempted manipulation in 2007 on the day the CFTC charged Amaranth Advisors LLC with attempted manipulation of the natural gas market, the regulator said in its notice Friday. The RBS employee changed a news story to replace Amaranth with the inter-dealer broker where the ISDAfix trades were handled and then e-mailed the story to colleagues, the CFTC said.

“[Swaps Trader 1] tried for manipulating ISDAFIX3 settlement ... [Swaps Trader 1] is on a recorded line shouting, ‘GET THE NINES DOWN [Broker], GET THE NINES DOWN, NOW NOW NOW.’ RBS could not be reached for comment,” the RBS e-mail said, according to the CFTC.

The broker was ICAP Plc, with its Jersey City, New Jersey brokering desk that was central to how the ISDAfix rate was set. Known in the industry as “Treasure Island” for how well the brokers were paid, the desk collected the bank submissions that were used to set the U.S. dollar ISDAfix.

The CFTC also said the RBS traders understood how their attempted manipulation affected their trading counterparts. “One noted that ‘we like tried to f-ck’ a bank counterparty on a cash settlement,” the CFTC said, quoting an RBS trader.

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 Richard Partington

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