CFTC Orders HSBC Bank USA, N.A. to Pay a $45 Million Penalty for Manipulative and Deceptive Trading in Connection with Swaps Related to Bond Issuances, Spoofing, and Supervision and Mobile Device Recordkeeping Failures
The Commodity Futures Trading Commission today issued an order simultaneously filing and settling charges against HSBC Bank USA, N.A. (HSBC), a provisionally registered swap dealer. The order charges HSBC with manipulative and deceptive trading related to swaps with bond issuers, spoofing, and supervision and mobile device recordkeeping failures at various times during approximately an eight-year period.
HSBC is ordered to pay a $45 million civil monetary penalty; to cease and desist from further violations of the Commodity Exchange Act’s (CEA) anti-fraud, anti-manipulation, supervision, and recordkeeping provisions; and to engage in specified remedial undertakings. HSBC has represented that it has already undertaken and continues to undertake extensive remedial measures, as described in the order.
“The Commission has zero tolerance for manipulative, deceptive or spoofing transactions, including by registered swap dealers,” said Director of Enforcement Ian McGinley. “Registrants need to take their supervisory responsibilities seriously to prevent this conduct. Today’s order makes it crystal clear that the CFTC will continue to vigilantly investigate and prosecute disruptions to market integrity and fraud and endeavor to protect all market participants, including swap counterparties, from abusive practices.”
The order finds HSBC violated the CEA at various times from approximately March 2012 to July 2020. On multiple occasions between March 2012 and 2015, traders at HSBC engaged in and attempted to engage in manipulative and deceptive trading in interest rate swaps, basis swaps, and swap spreads in connection with interest rate swaps that HSBC entered into with bond issuers (issuer swaps). The issuer swaps were priced in part based on prices displayed on pricing screens controlled by interdealer broker firms. HSBC traders intentionally traded at the broker firms controlling the relevant screens during telephonic pricing calls in which the bond issuances, and the related issuer swaps, were priced, and HSBC traders structured their trading intentionally to move prices for the relevant swaps on these screens. HSBC traders engaged in this conduct to increase the profitability of issuer swaps for HSBC to the detriment of HSBC’s counterparties.
As the order finds, by trading in such a way as to move market prices in a direction that was better for HSBC and worse for its counterparties during pricing calls, HSBC used its counterparties’ material confidential information about the timing and pricing of issuer swaps in a way that was materially adverse to the interests of its counterparties. HSBC also did not communicate with its counterparties in a fair and balanced manner based on principles of fair dealing and good faith. At times, supervisors and senior management at HSBC or its affiliates knew of, and even directed, HSBC traders to engage in this conduct.
From September 2015 to April 2016, HSBC, through the trader who supervised HSBC’s U.S. dollar swap desk, engaged in spoofing in the voice-brokered swaps market on a number of occasions. The trader placed bids or offers for swaps on a swap execution facility, which is a registered entity, with intent to cancel those bids and offers before execution. The trader engaged in this conduct to control prices on the broker’s pricing screen by placing spoof orders intended to prevent the relevant price from moving in a direction unfavorable to HSBC and then immediately cancelling those orders.
HSBC failed to diligently supervise, or establish and maintain a system to supervise, the conduct of its traders with respect to the manipulative and deceptive trading and spoofing as described in the order.
In addition, since 2014, HSBC has recorded calls made on mobile devices by using the services of a vendor. From at least March 2020 to July 2020, due to a recording failure, HSBC failed to make and keep required recordings of mobile phone calls that contained oral communications that led to the execution of swaps and related cash and forward transactions.
In accepting HSBC’s Offer of Settlement, the CFTC recognizes the substantial cooperation of HSBC with the Division of Enforcement’s investigation of this matter and appropriate remediation in the form of a reduced penalty.
The Division of Enforcement staff responsible for this matter are James G. Wheaton, Devin Cain, Benjamin Rankin, Trevor Kokal, Alejandra de Urioste, R. Stephen Painter, Jr., Lenel Hickson, Jr., and Manal M. Sultan, and former staff members Candice Aloisi and Gabriella Geanuleas.
I support the enforcement action that the CFTC brings today against HSBC Bank USA, N.A. because it protects market integrity, brings accountability for market manipulation, and builds on the CFTC’s record of holding banks accountable for their pervasive use of unauthorized communications to evade regulatory oversight. The communications between traders in the records that were properly kept reveal HSBC’s manipulative trading practices, and serve as an example of just how critical regulatory visibility into trader communications is to protect markets and investors, and promote market integrity.
This action illustrates why the CFTC’s previous “offline communication” enforcement actions, which levied over $700 million in penalties against 11 Wall Street banks, are critically important. Actions to evade regulatory oversight send a strong signal that there may be something that bankers are looking to hide. The CFTC, in partnership with the Securities and Exchange Commission (“SEC”), will continue to show zero tolerance for evading, or attempting to evade, regulatory oversight.
HSBC’s manipulation harmed clients and the integrity of markets.
HSBC’s illegal conduct stemmed from a widespread culture of non-compliance. Over the course of four years, HSBC traders used manipulative tactics to move swap and Treasury prices in a way that raised HSBC’s own profits at the expense of clients who were engaging in the trades as part of a broader deal to have HSBC issue bonds for them.
HSBC senior leadership directed these trades. Leadership and traders openly discussed their goal of manipulating prices, both internally and with the brokers whose prices screens were being manipulated. In one issuer swap transaction, the HSBC Head of North American Rates directed a trader to “push the screen as much as we can before the pricing.” Traders also described manipulation or potential manipulation using terms such as “hitting spreads down,” “hit[ting] the screen to avoid a los[s],” “hit[ting] the sht [sic] out of it,” “trying to get this screen down,” needing to “move [the] screen,” and “pushing [basis swaps] down.” These are but a few of many communications that evidence intent to manipulate the market.
Even discussions like these on HSBC’s recorded phone lines were not flagged by any type of surveillance, nor was the trading flagged by any trade surveillance system. When a broker firm raised instances of manipulative trading to HSBC’s attention, the bank’s compliance team did not investigate and simply warned the trader to be more careful.
Market manipulation undermines U.S. markets and threatens the public interest. There are concerning indications from this investigation that trading patterns like the ones the Commission found at HSBC may be followed by others in the swap markets.
Accountability for recordkeeping requirements increases the CFTC’s ability to identify market manipulation and other illegal conduct.
This action, and other “offline communication” cases, prove how critical recordkeeping requirements are to regulators’ ability to police U.S. markets. Some of the evidence of intent to manipulate prices come from messages recorded in compliance with CFTC requirements. That proves how pernicious it is for HSBC to flout recordkeeping requirements. HSBC’s culture of evasion threatens to undermine the visibility regulators use to stop illegal conduct and bring accountability. It also makes it much harder for the bank itself to operate a compliance program that can actually identify and halt manipulation.
Similar to other cases of this unacceptably common Wall Street offline communications practice, during an investigation into HSBC’s trading, the CFTC found that HSBC was unable to provide all responsive records. This triggered another investigation, where we found that most employees used unmonitored channels like personal text message, WhatsApp, or personal email, for firm business. Just like when they learned about market manipulation, senior leadership with compliance responsibilities knew and did nothing to fix the problem. Indeed, the senior officials responsible for HSBC’s compliance also used illegal offline communication platforms.
That awareness and participation by senior leadership in violations of law and bank policies is the common thread tying this case together. Banks serve as the first line of defense against insider trading, market manipulation and other illegal behavior that undermines market integrity. But they cannot serve that function if the “tone at the top” of the organization is one of evasion, manipulating markets for their own advantage, and seeing what they can get away with.
It’s far past time for all banks (Wall Street, foreign, or otherwise) to stop waiting until they are caught by regulators before halting illegal conduct. And if those banks cannot or will not shift their culture to one of compliance, then it’s time for the Commission to ramp up the penalties and other tools designed to deter illegal behavior.
Given the importance of recordkeeping to policing markets, resolution of this enforcement action must be strong to deter violations across the market.
We are now seeing that attempts to evade recordkeeping requirements are a global problem. The CFTC must use all of its tools to deter this conduct and send a zero-tolerance message. While I support the $90 million in combined penalties with the SEC, deterrence comes from more than penalties. In fact, penalties risk becoming a cost of business to large banks. Requiring defendants to admit to their wrongdoing is another important tool to promote deterrence to the fullest extent.
Last year, I proposed a Heightened Enforcement Accountability and Transparency (“HEAT”) Test for the CFTC to identify where the public interest goals of law enforcement would benefit from defendant admissions. This HEAT Test lays out conditions to identify cases where the CFTC should send a message about the strength of the enforcement program and the seriousness of the conduct at issue—and this case meets that test. The use of unauthorized communications platforms, including by senior supervisors and managing directors, was egregiously pervasive at HSBC. Continued use of unauthorized communication platforms threatens market integrity and may obstruct enforcement investigations, like those in the manipulation action, by obscuring or hiding records and communications. As we are seeing that use of unauthorized communication tools is a common evasive technique for both Wall Street and foreign banks, it is especially important to reinforce that requiring admissions of wrongdoing will be a routine feature of all settlements for these actions.
I applaud the CFTC for requiring HSBC to admit its unauthorized communications. Defendant admissions should be required in all offline communication cases, as a powerful tool of accountability, justice and deterrence.
I support this enforcement action against HSBC Bank USA, N.A., and thank the Division of Enforcement for their hard work on this matter. Fraud, manipulation, and disruptive trading practices have no place in our markets. I commend the Division for their aggressive pursuit of wrongdoing to the fullest extent permissible by law.
However, I feel compelled to remind the Commission and staff of our public responsibility to adhere to administrative law and best practices for administrative agency policymaking. See, e.g., Office of Management and Budget, Final Bulletin for Agency Good Guidance Practices, 72 Fed. Reg. 3432 (Jan. 25, 2007). By doing so, we can minimize the pitfalls of regulation by enforcement.
It is incumbent upon the Commission to be guided by these three key objectives in its speaking orders on enforcement actions: (1) provide regulatory clarity and clear expectations for compliance; (2) deter future violations to the greatest extent possible; and (3) avoid disruption to the markets and market participants.
Accordingly, in order to serve these objectives and provide robust legal discussion of authorities, the Commission must include its prior interpretations of the Commodity Exchange Act (CEA) as cited precedent in its speaking orders.
For example, the Commission promulgates regulations (usually through Administrative Procedure Act notice-and-comment rulemaking) to interpret and implement the CEA. In addition, particularly with respect to Dodd-Frank amendments, the Commission issues interpretive guidance and policy statements to interpret and implement the CEA.
Such Commission interpretive guidance and policy statements are “agency action” voted on by the Commission, and are distinct from staff guidance such as staff letters and advisories that do not bind the Commission.
Under administrative law, agency guidance includes “interpretive rules and policy statements.” See, e.g., Blake Emerson and Richard M. Levin, Agency Guidance through Interpretive Rules: Final Report (May 28, 2019), Administrative Conference of the United States Judicial Review Committee, available at https://www.acus.gov. The Commission has issued such an “interpretive rule” (as opposed to a “legislative rule”) stylized as, or part of, an “interpretive guidance and policy statement.” See, e.g., SIFMA v. CFTC, 67 F. Supp.3d 373, 424 (D.D.C. 2014).
Where the Commission has taken agency action to interpret the CEA, that Commission interpretation controls until the Commission changes its interpretation on a “reasoned basis.” I emphasize this specific canon of administrative law, because the Commission does not often issue interpretive guidance, policy statements, or interpretive rules, and so it bears reminding now.
Therefore, I believe that cited precedents in consent orders for enforcement actions must include not only the CEA and Commission regulations, but also Commission interpretive guidance and policy statements, especially Commission interpretive rules. This is particularly necessary for speaking orders where there is new precedent being created, or heightened sensitivity regarding the above objectives of providing regulatory clarity, deterring violations, or avoiding disruption.
This is the first time that the Commission will find a violation of spoofing in voice brokered swaps markets under Section 4c(a)(5)(C) of the Act, 7 U.S.C. Section 6c(a)(5)(C) (“anti-spoofing provision”).
Because this is a case of first impression, the Commission must ensure that its Order meets these three objectives: (1) to provide regulatory clarity and clear expectations for compliance; (2) to deter future violations to the greatest extent possible; and (3) to avoid disruption to the markets and market participants.
To address these objectives, and in recognition of the need to distinguish legitimate trading activity from spoofing, the Commission engaged in substantial policymaking efforts over three years (from 2010-2013) to interpret and implement the anti-spoofing provision of the CEA, and established an incredibly extensive administrative record with public comment to support those efforts, including an advance notice of proposed rulemaking, public roundtable, proposed interpretive order, and finally, issued an Antidisruptive Practices Authority Interpretive Guidance and Policy Statement, 78 Fed. Reg. 31890 (May 28, 2013) (“2013 spoofing interpretation”).
The same concerns and considerations that were well-founded at that time remain of equal import today. As registered entities such as swap execution facilities (SEFs) and market participants consider where to draw the line between legitimate trading activity in voice brokered markets and spoofing violations, it is informative to look to the Commission’s controlling 2013 spoofing interpretation:
“[T]he Commission interprets the statute to mean that a legitimate, good-faith cancellation or modification of orders (e.g. partially filled orders or properly placed stop-loss orders) would not violate CEA section 4c(a)(5)(C) . . . When distinguishing between legitimate trading . . . and “spoofing,” the Commission intends to evaluate the market context, the person’s pattern of trading activity . . . and other relevant facts and circumstances.”
Because the facts of the alleged spoofing violation in this case as described in the consent order are significantly different from previous cases involving electronic / algorithmic trading and order books, it is even more important for SEFs and market participants to note the Commission’s 2013 spoofing interpretation where the Commission identified four non-exclusive examples of spoofing behavior.
Although the facts in this case do not fall within the first three examples of “classic” spoofing behavior, it does fall within the fourth example: “submitting or canceling bids or offers with intent to create artificial price movements upwards or downwards.”
Further, the United States Court of Appeals for the Seventh Circuit stated in United States v. Coscia, 866 F.3d 782, 787, 795 (7th Cir. 2017), that spoofing “differs from legitimate trading, however, in that it can be employed to artificially move the market price of a stock or commodity up or down, instead of taking advantage of natural market advantages . . . Spoofing . . . requires an intent to cancel the order at the time it was placed” (emphasis in original).
This enforcement speaking order does not reference the Commission’s 2013 spoofing interpretation. Therefore, I have issued this statement on spoofing in voice brokered swaps markets to better provide regulatory clarity and clear expectations for compliance, deter future violations to the greatest extent possible, and avoid disruption to the markets and market participants.