Goldman Sachs Being Bad Boys & Systemic Risk Posed by U.S. and Chinese Banks

CFTC Orders Goldman Sachs to Pay $120 Million Penalty for Attempted Manipulation of and False Reporting of U.S. Dollar ISDAFIX Benchmark Swap Rates

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) issued an Order today filing and settling charges against The Goldman Sachs Group, Inc., and Goldman, Sachs & Co. (collectively, Goldman or the Bank). The Order finds that, beginning in January 2007 and continuing through March 2012 (the Relevant Period), Goldman attempted, by and through certain of its traders in New York, on many occasions to manipulate and made false reports concerning the U.S. Dollar International Swaps and Derivatives Association Fix (USD ISDAFIX), a global benchmark for interest rate products. Goldman’s unlawful conduct involved multiple traders, including the head of Goldman’s Interest Rate Products Trading Group in the United States, according to the CFTC Order.

The CFTC Order requires Goldman to pay a $120 million civil monetary penalty, cease and desist from further violations as charged, and take specified remedial steps, including measures 1) to detect and deter trading intended to manipulate swap rates such as USD ISDAFIX, 2) to ensure the integrity and reliability of the Bank’s benchmark submissions, and 3) to improve related internal controls. The Order also requires the current supervisor responsible for oversight of various United States interest-rate trading desks at Goldman to provide a certification as to, among other things, the effectiveness of the internal controls and procedures undertaken and implemented by Goldman as a result of this settlement.

“This matter, the third enforcement action relating to the ISDAFIX benchmark, demonstrates the breadth of this kind of misconduct across the industry, and within Goldman, the extent of the misconduct across trading desks and product lines,” commented Aitan Goelman, the CFTC’s Director of Enforcement. Mr. Goelman further commented that “the Division will continue to be vigilant and aggressive in protecting the integrity of the ISDAFIX and other important benchmarks relied upon by the markets.”

Goldman, through its traders, bid, offered, and executed transactions in interest rate swap spreads, U.S. Treasuries, and Eurodollar futures contracts in a manner deliberately designed—in timing, price, and other respects—to influence the published USD ISDAFIX in order to benefit the Bank in its derivatives positions, according to the Order. In addition, Goldman, through its employees making the Bank’s USD ISDAFIX submissions, also attempted to manipulate and made false reports concerning USD ISDAFIX by skewing the Bank’s submissions in order to benefit the Bank at the expense of its derivatives counterparties and clients.


ISDAFIX rates and spreads are among the leading benchmarks for interest rate swaps and related derivatives, indicating the prevailing, daily market rate for the fixed leg of a standard fixed-for-floating interest rate swap in various currencies. USD ISDAFIX rates and spreads are published daily (now under a different name and methodology) for various maturities of U.S. Dollar-denominated swaps. The USD ISDAFIX rate is used for valuing cash settlement of options on interest rate swaps, or swaptions, and as a valuation tool for a wide range of products across financial markets. For example, during the Relevant Period, USD ISDAFIX was used in settlement of exchange-traded interest rate swap futures contracts and as a component in the calculation of various constant maturity swaps, spreadlocks, proprietary interest rate indexes, and other structured products. Many parties, including pension funds and local and state governments in the United States, rely on such instruments based on USD ISDAFIX to hedge against changes in interest rates.

During the Relevant Period, USD ISDAFIX was set each day in a process that began at exactly 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, which disseminated the rates and spreads captured in this 11:00 a.m. “snapshot,” “fix,” or “print”—as it was referred to by traders and brokers—to a panel of banks including Goldman. The banks then made submissions to indicate where they would each bid or offer interest rate swaps to a dealer of good credit.

Goldman’s Unlawful Conduct to Benefit Derivatives Positions

As found in the Order, Goldman attempted to manipulate USD ISDAFIX through its trading at the 11:00 a.m. fixing as well as by skewing the Bank’s submissions, in order to benefit a range of derivatives positions held by Goldman that were priced or valued against the USD ISDAFIX benchmark.

Goldman traders bid, offered, and executed transactions of swap spreads, U.S. Treasuries, and Eurodollar futures contracts at the critical 11:00 a.m. fixing time with the intent to affect the “print,” i.e., the reference rates captured at 11:00 a.m. and sent to submitting banks, and thereby to affect the published USD ISDAFIX. As captured in emails and audio recordings, when Goldman had derivatives positions settling or pricing against USD ISDAFIX, Goldman traders discussed their intent to move USD ISDAFIX in whichever direction benefitted their positions. Goldman traders stated their manipulative goals in plain language, such as directing their swap broker to “spend what you need, but make SURE we get the print,” and even objected when their attempts to manipulate were not performed as inexpensively as possible, such as when the former head of Goldman’s swap trading desk complained, “I should control the screen without having to given [sic] some loser another [trade].”

Among themselves, Goldman traders described trades based on the manipulated USD ISDAFIX as being based on the “jacked price,” as opposed to the “fair price”; remarked that other Goldman traders had “gamed the fix” in order to benefit related positions; and strategized how best to extract the “higher value” of USD ISDAFIX cash settlements against customers who lacked Goldman’s view, as a major swap dealer, into the USD ISDAFIX setting process.

To complement these efforts, as found in the Order, on many occasions during the Relevant Period, Goldman traders made USD ISDAFIX submissions higher or lower for the purpose of benefitting derivative positions priced or valued against the benchmark. As the Order finds, these submissions by Goldman were false, misleading, or knowingly inaccurate because they did not report where Goldman would itself bid and offer swaps absent a desire to manipulate the USD ISDAFIX, but rather reflected prices that were more favorable to the Bank’s specific derivatives positions.

The Order describes multiple examples of each of these strategies for attempted manipulation and false reporting by Goldman traders during the Relevant Period.

The Order notes that prior to the latter stages of the Division’s investigation, Goldman’s cooperation was not satisfactory. Goldman did not make certain productions as expeditiously as the Division expected and initially failed to produce certain communications and documents that were potentially relevant to identifying misconduct. The Order recognizes that Goldman took remedial action to improve internal controls and policies related to ISDAFIX and its successor benchmark.

The CFTC thanks and acknowledges the assistance of the U.K. Financial Conduct Authority and the Newark, New Jersey Field Office of the Federal Bureau of Investigation.

CFTC Division of Enforcement staff members responsible for this case are Candice Aloisi, Gates S. Hurand, Trevor Kokal, David W. MacGregor, Chad E. Silverman (former staff), K. Brent Tomer, Lenel Hickson, Jr., and Manal M. Sultan.

The following staff members also assisted in this case: Jason Fairbanks, Jordon Grimm, David C. Newman, David W. Oakland, Mark A. Picard, and James G. Wheaton.

Office of Financial Research: New Data Highlight Changes in Systemic Risk Posed by U.S. and Chinese Banks

Three of the biggest U.S. banks have moved up in systemic risk ratings, according to new international data the OFR added today to its online interactive chart.

The risk ratings of Chinese banks also rose, continuing a three-year trend.

By shedding light on changes in banks’ systemic importance indicators, the OFR’s interactive chart increases the transparency of the process for identifying global systemically important banks (G-SIBs).

The Basel Committee on Banking Supervision updates G-SIBs’ systemic risk scores annually. Based on these scores, the banks are assigned to buckets. National supervisors use these buckets to determine how much additional capital each bank must hold. This extra capital is meant to reduce the risk of default by the largest banks. An OFR brief published in April 2016 contains a detailed analysis of this methodology.

The new data show that Bank of America, Citigroup, Industrial and Commercial Bank of China, and Wells Fargo each moved up a bucket. Barclays, HSBC, and Morgan Stanley moved down a bucket. The list of banks identified as G-SIBs remained unchanged. Of the 30 global G-SIBS, eight are U.S. banks.

The data extend for a third year the upward trend in the systemic importance scores of China’s G-SIBs. Agricultural Bank of China, Bank of China, China Construction Bank, and Industrial and Commercial Bank of China each have received higher scores every year since 2013. However, the largest U.S. banks have notably higher systemic importance scores than any Chinese bank and face the largest capital surcharges under the Basel framework.

The international comparisons have three features worth noting. First, comparing U.S. and foreign banks can be difficult due to differences in accounting standards. However, the G-SIB data are especially valuable because they allow for international comparisons.

Second, currency fluctuations can have a significant impact on bank scores under the Basel methodology. If exchange rates had remained unchanged from 2014, Bank of America, Citigroup, and Wells Fargo would not have moved up a bucket. (This effect is discussed in an earlier OFR brief.

Third, the Basel bucketing methodology allows for cliff effects in banks’ movements between buckets. If a bank’s score is close to its bucket’s high or low threshold, a small change in score could move the bank to another bucket. If a bank’s score is far from a threshold, a big change in score might not move the bank to another bucket.

For example, from 2014 to 2015, China Construction Bank’s score increased by more than 42 basis points. But that change was not enough to push the bank into the next more risky bucket. As a result, the increase did not raise the bank’s capital requirement.

In contrast, Citigroup’s score increased by fewer than four basis points. But Citigroup moved up to the next more risky bucket because it was already close to the threshold. Scores for Groupe BPCE and Royal Bank of Scotland declined steeply, but not enough to push them out of the lowest-risk bucket, so they remain G-SIBs.

Although the new data show how U.S. banks rank internationally, some U.S. banks face higher capital surcharges than the Basel methodology dictates. This is because U.S. supervisors have adopted a modified methodology for U.S. banks. The U.S. rule uses both the Basel methodology and an alternative formula, and then applies the higher of the two results to determine a bank’s capital surcharge.

Implementation of the U.S. G-SIB capital surcharge began in January 2016. The requirements will be fully phased in by 2019.

Mike Dodd

I have a wide range of views and opinions. I have worked in a number of industries some of them are: Banking, Dairy, Health Insurance, Education and Government. I am the owner and editor in charge of a number of websites and message boards. The crown jewel of the websites is which covers a wide variety of content. The Wave Chronicle is a site built to put forth thought provoking information, which can range from activism, politics, technology, philosophy, climate change, education, futurist / transhumanist theory and some fun articles that tend to be on the conspiracy theory side. Finally, I am also an accomplished no limit holdem poker player who sadly does not see enough time at a poker table.

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