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CFTC Nails Citi for $425 Million

The Commodity Futures
Trading Commission has issued two orders filing and settling charges against Citi for misconduct in interest rate markets,
including the ISDAfix, Libor and Tibor interest rate benchmark fixings

The first CFTC order
finds that, beginning in January 2007 and continuing through January 2012, Citi
“on multiple occasions” attempted to manipulate, and made false reports
concerning the US Dollar International Swaps and Derivatives Association Fix
(USD ISDAfix).

CFTC has subsequently
fined Citi $250 million in civil monetary penalties and ordered it to
immediately cease and desist from further violations of the Commodity Exchange
Act. Further, Citi is required take specified steps to implement and
strengthen its internal controls and procedures, including measures to detect
and deter trading potentially intended to manipulate swap rates such as USD
ISDAfix and to ensure the integrity of interest-rate swap benchmarks.

“The CFTC’s order 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,” says Aitan Goelman, the CFTC’s director of enforcement.
“The terms of this settlement are intended to reflect all aspects of Citibank’s
response to the investigation, including the evolving nature of its

CFTC says that by and
through certain of its traders, it attempted to manipulate and made false reports
concerning USD ISDAfix by skewing the bank’s submissions, in its role as a
panel bank in the rate setting process. In addition, CFTC says Citi’s traders
bid, offered, and executed trades in targeted interest rate products, including
swap spreads and US Treasuries, in a manner designed – including in timing and
pricing – to influence the published USD ISDAfix to benefit the bank in its
derivatives positions.

CFTC publishes electronic
communications, in which Citi traders boast about “pushing out the isdafixing”
or “push[ing]” the market, describe USD ISDAfix as being “suprising[ly] easy to
push,” and explained the best way to “influence the set.”

In what has become a
depressingly familiar process, the order describes multiple examples involving
these strategies for attempted manipulation and false reporting by Citi during
the relevant period.

The order recognizes
Citibank’s cooperation with the CFTC Division of Enforcement’s investigation in
this matter, but notes that at the outset of the investigation, the bank’s
cooperation “was not sufficient”. According to the order, Citi’s
cooperation improved after the Division said that it expected the bank to make
productions more expeditiously, “after which Citi discovered and produced
evidence showing that its initial statements about certain misconduct were

The second CFTC order
is also against two Citi affiliates in Japanrelating to abuses of the
London Interbank Offered Rate (Libor) and the Euroyen Tokyo Interbank Offered
Rate (Euroyen Tibor) benchmarks.

Specifically, Citi’s
Global Markets Japan (CMGJ) unit is charged with attempting to manipulate Yen Libor
and Euroyen Tibor, and Citibank Japan Limited (CJL) with false reporting of
Euroyen Tibor, to benefit derivatives trading positions that were priced based
on Yen Libor or Euroyen Tibor.

Separately, Citi is
charged with the false reporting of US dollar Libor at times to avoid
generating negative media attention and to protect its reputation during the
financial crisis from the spring of 2008 through the summer of 2009.

Citi and its
affiliates are ordered jointly and severally to pay a civil monetary penalty of
$175 million, immediately cease and desist from further violations of the
Commodity Exchange Act as charged, and adhere to specific undertakings to
ensure the integrity of its Libor, Euroyen Tibor, and other benchmark interest
rate submissions.

“The CFTC remains
steadfast in its commitment to ensure the integrity of global benchmarks that
are critical to the US and international financial markets,” says Goelman. “As
evident by today’s actions, the CFTC’s vigilance includes holding a financial
institution, like Citi, responsible each time it acts to undermine a benchmark
for its personal profit or benefit.

“At the same time, the
CFTC recognises Citi for promptly self-reporting the yen Libor misconduct to
the Division of Enforcement. The value of self-reporting violations in a timely
and effective manner and providing cooperation consistent with that of a
responsible player in our markets will not go unnoticed by the CFTC.”

The order specifically finds
that CGMJ traders attempted to manipulate Yen Libor on multiple occasions from
at least February 2010 through August 2010, and Euroyen Tibor, at times, from
April 2010 through June 2010, to benefit the derivatives trading positions of
those traders.

“Specifically, a
Tokyo-based senior Yen derivatives trader, hired by CGMJ to enhance the bank’s
reputation in the Tokyo derivatives market, attempted to manipulate the
benchmark fixings by using his contacts at other Yen Libor panel banks and at
interdealer brokers to influence the Yen Libor submissions of other yen panel
banks,” the order states. “In addition, a senior manager who ran CGMJ’s Tokyo
interest rates derivatives trading desk pressured CJL’s Euroyen Tibor
submitters to adjust their submissions to benefit the senior yen trader’s
derivatives trading positions.

“CJL’s Euroyen Tibor
submitters, on a few occasions, took the senior yen manager’s requests into
account when making Euroyen Tibor submissions,” it adds.

The order further
finds that at times from the spring of 2008 through the summer of 2009, Citi’s
US dollar Libor submitters based its submissions on “a desire to avoid
generating negative media attention and to protect Citi’s reputation in the

As the financial
crisis progressed through 2008, the order says Citi experienced financial
challenges that included liquidity concerns. During this time, Citi received a
significant infusion of funds from the US government to alleviate the stresses
in its funding.

“Citi, at times, had
difficulty securing funding in the London interbank market at or below Citi’s Libor
submissions, particularly in the longer tenors,” the order says. “Citi’s US dollar
Libor submitters became concerned about the signaling effect that [the bank’s]
submissions could have in the market. The submitters realised that Citi’s submissions
could draw negative media attention and raise questions about the stability of
the bank.

“Accordingly, during
this period, Citi’s submitters, at times, made US dollar Libor submissions
based in whole or in part on a desire to avoid that negative scrutiny, rather
than based on the fact that Citi, at times, would have had to pay above Libor in
the London interbank market, particularly in the longer tenors, when securing
funding for the bank,” it adds. “As a result, Citi’s US dollar Libor submissions,
at times, did not accurately or solely reflect Citi’s assessment of the costs
of borrowing unsecured funds in the London interbank market.”

The CFTC notes that Citi and
its affiliates engaged in this conduct after they knew that the CFTC was
investigating bank’s US dollar Libor submission practices. “Moreover, during
late 2009, in meetings with Citi senior managers, the senior yen trader talked
openly about how he had tried to manipulate Yen Libor at his prior place of
employment,” CFTC states. “Even though they were aware of the CFTC’s
investigation, the senior managers did not notify the legal or compliance
departments about the senior yen trader’s admissions.”

The order recognises the
cooperation of Citi and its affiliates with the CFTC Division of Enforcement’s
investigation. The CFTC also notes that in the summer of 2010, Citi identified
the misconduct with respect to Yen Libor and Euroyen Tibor, and promptly
self-reported the misconduct of the yen traders to the CFTC.

Twitter @lamboPnL

Twitter @Profit_and_Loss

Colin Lambert

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