Release Number 8581-22
CFTC Charges Swap Dealer for Failure to Supervise Valuation Activities on Two Derivatives Trading Desks
September 06, 2022
Washington, D.C. — The Commodity Futures Trading Commission today issued an order filing and settling charges against Natixis, a global bank and swap dealer, for failure to diligently supervise traders on the bank’s New York-based Interest Rate Derivatives Desk (IRD Desk) and its Equity Derivatives Flow and Solution Trading Desk (FAST Desk). The traders on the IRD Desk and FAST Desk separately engaged in misconduct by mismarking their positions for the purpose of either inflating profits and minimizing losses, or to “smooth” out returns, respectively. The order requires Natixis to pay a $2.8 million civil monetary penalty, cease and desist from violating applicable provisions of the Commodity Exchange Act (CEA) and CFTC regulations, and comply with certain conditions and undertakings.
“Swap dealers must comply with their supervisory and regulatory responsibilities under the CEA and Commission regulations, and ensure that their valuation controls are properly calibrated to ensure that derivatives positions reflect fair value,” said CFTC Acting Director of Enforcement Gretchen Lowe.
The order finds that Natixis failed to diligently supervise the activities of the IRD Desk. Between January 2015 and at least April 2018, a trader on the bank’s IRD Desk submitted false or misleading entries in the bank’s internal recordkeeping and accounting system relating to the marking of the end-of-day USD LIBOR forward curve (Closing Curve), for the purpose of inflating the unrealized profit and loss (P&L) of the desk he managed and disguising significant trading losses. Specifically, the trader engaged in a pattern of marking the Closing Curve in a manner that varied from observed broker mid prices and in a manner that aligned with the risk positions of the IRD Desk, while generally staying within the limits of internal controls designed to detect mismarking. Although Natixis maintained certain controls relating to the marking of the Closing Curve, those controls were insufficient to detect the trader’s misconduct for over three years. At its peak in early 2018, the trader’s mismarking of the Closing Curve overstated the P&L of the IRD Desk by approximately $25 million.
As a result of the bank’s supervisory failures, its books and records were inaccurate in several respects, and Natixis further failed to comply with certain obligations to provide accurate daily mark disclosures to certain counterparties, to properly calculate margin, and to report accurate swap valuation data to a swap data repository.
In addition, the order further finds that Natixis failed to diligently supervise the activities of its FAST Desk. Specifically, between February 2017 and November 2019, traders on the FAST Desk made certain manual adjustments to the bank’s internal trade booking systems for the purpose of “smoothing” or hiding the FAST Desk’s P&L and later releasing the P&L during difficult market conditions. At its peak, the P&L smoothing understated the unrealized P&L of the FAST Desk by over $6 million. This misconduct rendered the bank’s books and records inaccurate.
In accepting the bank’s offer of settlement, the CFTC recognizes its substantial cooperation during the Division of Enforcement’s investigation of this matter. The CFTC notes that the bank’s substantial cooperation and remediation are recognized in the form of a reduced civil monetary penalty.
Division of Enforcement staff members responsible for this action are Trevor Kokal, John Buffington, John C. Murphy, David Oakland, Patryk J. Chudy, Lenel Hickson, Jr., and Manal M. Sultan. Pamela Geraghty from the Market Participants Division and Owen Kopon of the Division of Market Oversight assisted with this matter.