The US Commodity Futures Trading Commission (CFTC) has filed civil enforcement action in the US District Court for the Southern District of New York against Christophe Rivoire, former global head of flow rates at HSBC in New York, charging him with engaging in a deceptive scheme to manipulate the pricing of an interest rate swap between a bond issuer and a global investment bank.
The complaint alleges that in June and July 2012, Rivoire knew that a bond issuer had negotiated with HSBC to price a bond issuance and a related swap using specific screens displaying prices from an interdealer broker firm, including prices for US dollar interest rate basis swaps with a five-year maturity. It reveals that Rivoire had provided pricing levels at which HSBC and its affiliates would be willing to enter into the issuer swap and claims that the issuer took into account the pricing levels Rivoire provided when selecting the bank as a joint lead manager of the bond issuance as well as to provide the issuer swap.
The complaint also notes, however, that by late June 2012, Rivoire had come to believe that the prices he had provided for the issuer swap had failed to account for certain economic terms and that therefore HSBC had agreed to enter into the swap with the issuer at a price at which the bank would lose money. A loss on the issuer swap would impact the profitability of the interest rate business that Rivoire supervised and could reflect negatively on Rivoire’s management of the business or affect Rivoire’s compensation, the complaint states, adding that concerned about potentially losing money, Rivoire repeatedly pushed for the bank to re-negotiate the terms of the swap with the issuer, including charging it more for. “Rivoire’s efforts, however, were ultimately unsuccessful,” the complaint states.
By early July 2012, Rivoire had been reminded that the issuer swap would be priced not only with reference to the five-year US treasury and five-year swap spread rates, but also with reference to the five-year basis swap, the complaint alleges, something which Rivoire said “makes another huge difference” in the profitability of the issuer swap to the bank. A subsidy was paid to the businesses under Rivoire’s supervision but it did not take into account that the swap would be priced with reference to the five-year basis swap. The CFTC says that Rivoire repeatedly complained about the negotiations with the Issuer over various aspects of the issuer swap, at one point characterising the situation as “ridiculous.”
As has become common in these cases, the prosecution is using selected internal communications to support the charges, these include discussions about pricing the issuer swap during the Asian trading sessions as there was a higher probability of pushing the market around.
In other internal communications, Rivoire stated repeatedly that HSBC needed to “drive” and “control” the execution of the issuer swap to reduce the losses he anticipated. In one such communication, he stated, according to the complaint, that the bank needed to “drive the execution process” of the bond issuance and issuer swap “to minimise the losses.”
In another communication, CFTC says Rivoire reiterated that his goal was to “minimise” the loss on the issuer swap “as much as possible in executing the trade smoothly and efficiently,” which would require the bank to “control the execution process and not [the issuer].” Rivoire concluded that “[t]he more we control it, the more we minimise the cost,” the complaint alleges, and in a third communication, he stated that “we need to control the execution of the transaction and not [the issuer]. If it is not the case, the return may be dramatically lower.”
It further alleges that Rivoire was informed by another member of HSBC’s Debt Capital Markets team that the issuer was “innocent” and would be happy as long as the price reflected that on a specific broker screen.
To effectuate the scheme, the CFTC alleges that Rivoire induced a trader under his supervision and explicitly directed the trader to “push the screen as much as we can before the pricing” of the swap with the issuer. This meant trading in a manner that would result in a lower price for five-year basis swaps. The trader asked if they should be “pre-hedging” the $2 billion transaction and the CFTC says that Rivoire responded that it “may be indeed good to start to pre hedge it as we have the visibility”, although the comnplaint says that to push the screen the trader in fact deferred hedging the position.
The complaint alleges that the trader followed Rivoire’s direction and enlisted the help of a broker at the interdealer broker firm, including telling the broker in advance that the trader needed to move prices on the screens. During the pricing of the swap, Rivoire directed the trader when to sell a large quantity of swaps to manipulate the prices on the broker screens, the Commission further alleges. It also claims that the trader directed the broker to move a price displayed on a screen in the absence of any market activity, which was against the broking firm’s policies, and that he pushed the broker to make sure the broker screens were controlled in the US to make them easier to push.
Without disclosing his directions to the trader or their conduct prior to the final pricing of the swap, the CFTC says that Rivoire falsely or misleadingly told the issuer, telling the issuer, “Obviously we are not controlling the screen.” The complaint alleges that the scheme had the effect of moving prices on the broker screens and, because the manipulated prices were used to price the swap, it resulted in a more profitable transaction for HSBC and a less profitable transaction for the issuer. This conduct deceived the bond issuer and other market participants.
“Combating manipulative and deceptive conduct in the swaps markets is crucial to our agency’s mission to preserve market integrity and to protect market participants,” says CFTC director of enforcement James McDonald. “We will continue to vigorously pursue all forms of misconduct in the swaps markets, including misconduct related to swaps with bond issuers like that alleged here.”