Early this morning – EDT time, the U.S. Commodity Futures Trading Commission (CFTC) issued an Order against RP Martin Holdings Limited and its subsidiary, Martin Brokers (UK) Limited – an inter-dealer broker, filing and settling charges of manipulation, attempted manipulation, false reporting, and aiding and abetting derivatives traders’ acts of manipulation and attempted manipulation of the London Interbank Offered Rate (LIBOR) for yen.
The yen LIBOR is a leading interest rate benchmark used to price trillions of dollars of transactions, and according to the CFTC’s press release about the simultaneous action and settlement, RP Martin and its subsidiary, as part of the order will pay a total $1.2 million civil monetary penalty, with the CFTC having already accepted its offer of settlement, according to the document dated May 15, 2014.
Double Action as FCA and CFTC Strike Today with Combined $2.2M Fine
The United Kingdom’s Financial Conduct Authority (FCA) also issued its own action announced today against Martin Brokers (UK) Limited and imposed a penalty of £630,000 (the equivalent of approximately $1 million).
Martin Brokers agreed to settle at an early stage of the investigation and therefore qualified for a 30% discount under the FCA’s settlement discount scheme. Without the discount, the fine would have been £900,000, as per the FCA update. This brings the combined total from both the FCA and CFTC announcements to $2.2 million, payable by RP Martin as part of its settlement.
RP Martin Prepared Statement Given to Forex Magnates
Forex Magnates’ reporters obtained an official statement from a company spokesperson around time of our coverage, it read as follows: “RP Martin’s new senior management team co-operated fully with the FCA and CFTC in their investigations and entirely respect the fine and sanctions imposed. Over the last 12 months the Board comprehensively restructured the firm’s governance, systems and controls, and compliance procedures.”
The FCA press release explained that Martin Brokers would have been fined £3,600,000 but for the fact that the firm was able to show that it could not pay a penalty of that amount – in addition to the other regulatory fines that Martins faces in relation to LIBOR, the fine was therefore adjusted.
Commenting in that FCA press release, Tracey McDermott, Director of Enforcement and Financial Crime explained, “Inter-dealer brokers are expected to act as trusted intermediaries and are key conduits of market information. Martins abused this position of trust by providing false information to Panel Banks, with no regard for the integrity of the market. This is unacceptable behaviour from any market participant.”
Mrs. McDermott added, “The culture at Martins was that profit came first. Compliance was seen as a hindrance and the firm lacked the means to detect the “wash trades”. In this environment, broker misconduct was almost inevitable. Similar cultural failings at other firms have caused havoc in the financial services industry. As we have said before, firms need to take their responsibilities to uphold market integrity seriously. If firms fail to heed these warnings then we will take action against them.”
The FCA summarized its findings as follows:
- Communicating skewed suggestions to some Panel Banks as to where they believed the published JPY LIBOR rate would be set for a particular day (known as “run-throughs”);
- Creating false (or “spoof”) orders, with the aim of influencing Panel Banks’ views of the cash market so that they would make JPY LIBOR submissions at levels that benefited the UBS trader;
- Requesting certain Panel Banks to make specific JPY LIBOR submissions.
Anti Market Manipulation Must Be Implemented
In addition, RP Martin and its subsidiary named in the CFTC action, must undergo a series of changes to institute, implement and/or strengthen compliance and supervisory policies, procedures and internal controls designed to ensure integrity of its market publications, and detect, deter and prevent the sharing of false or misleading market information contained therein, as described by the order, as an example of what it has agreed to do as part of the settlement.
These agreements included, as part of its cooperation with the CFTC, among other things:
- Base written benchmark interest rate related predictions on certain factors;
- Document and retain basis for market publications;
- Require certain disclosures, including that certain market information reflects the opinions of the author, sources of information or data upon which opinion is based, and use of any models, correlated markets or related trading instruments;
- Review certain electronic and audio communications;
- Implement auditing, monitoring and training measures;
- Report to the CFTC on its compliance with the terms of the Order;
- Continue to cooperate with the CFTC.
The CFTC order found that RP Martin brokers on its Japanese yen desk, at times had knowingly disseminated false and misleading information concerning yen borrowing rates to market participants, in attempts to manipulate, at times successfully, the official daily fixings of yen LIBOR.
The CFTC said this was done by RP Martin brokers primarily to aid and abet a senior yen derivatives trader employed at UBS Securities Japan Co., Ltd., and later at another bank, who attempted to influence yen LIBOR to benefit his derivatives trading positions tied to this benchmark.
Example Acts of Behavior That CFTC Referenced in Case against RP Martin
In exchange for this unlawful assistance from RP Martin brokers to various traders, the CFTC said RP Martin brokers accepted $400,000 in payments, as kick-backs, hidden in wash trades designed merely to generate commissions, according to the order.
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A long string of correspondents between multiple RP Martin brokers and traders were detailed as part of the CFTC’s case, with excerpts of conversation dated from July 2008 through June 2009, such as the following example from one of the phone calls listed in the order:
5th Telephone Call:
Yen Broker 1: Can you do me a favor?
Arbitrage Desk Head: Only if you tick the arbi box on that deal.
Yen Broker 1: We’ve got a f*cking, yes, we’ve got a f*cking huge deal but on the back of it he’s asked me to do him a favor and see if I can have a word with a couple of people, see if LIBOR, see if I could get it down a pip. Would you – Bank 6 is setting his at 68 at the moment, do you reckon he might, ask him if he might be able to set it at 67 just today for us?
Arbitrage Desk Head: 3’s LIBOR at 67?
Yen Broker 1: Yes, instead of 68. It would be a big favor. ***
Arbitrage Desk Head: All right, all right.
Cross Border Regulatory Collaboration Aided Investigation
Commenting in the official press release from the regulator, Gretchen Lowe, Acting Director of the CFTC’s Division of Enforcement said, “Today’s action is part of our on-going efforts to ensure that the LIBOR rate is free of fraud and manipulation. Further, this action reflects the Commission’s unwavering commitment to hold those who seek to undermine the integrity of the U.S. financial markets responsible for their actions.”
Mrs. Lowe added, “I thank the hardworking staff of the CFTC and our colleagues in the U.K. for their continued dedication and vigilance to protect market integrity.”
The CFTC Order also recognized the cooperation that RP Martin had with the agency in the final stages of the Division of Enforcement’s investigation and the resolution of this matter. And the Agency thanked the FCA – who added it was a significant cross-border effort – aiding by the FBI’s Washington field office, and the U.S. department of justice.
Benchmark Rigging Fines Totaling Several Billions of Dollars Worth
The CFTC said that this order brings the total of 6 related actions to a total of $1.766 billion of penalties on various entities for manipulative conduct with respect to LIBOR submissions and other benchmark interest rates. A full copy of the RP Martin order by the CFTC can be found on the commission’s website and the FCA press release was also released on the UK regulators main page.
Today’s announcement also relates to the European Commission (EC) action against eight dealers in which RP Martin was included, including a fine totaling over €1.71 billion as covered by Forex Magnates in early December 2013, and related to yen LIBOR, among other benchmarks found by the EC to have been rigged. This brings the total fines resulting from these cases to over $4 billion (converting the prior euro amount from the EC’s action – using today’s rates – for comparison).