JPMorgan to Pay $65 Million Fine to Settle Charges of ISDAfix Manipulation

The ISDAfix benchmark is widely used in setting payout rates on a range of interest rate products.

The US Commodity Futures Trading Commission said it ordered JPMorgan Chase to pay a $65 million fine as part of an agreement to settle charges of attempting to manipulate a major benchmark interest rate, according to a CFTC statement.

The regulator said on Monday that JPMorgan traders attempted to manipulate the US dollar iteration of ISDAfix, or the International Swaps and Derivatives Association Fix, from January 2007 through to 2010.

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The ISDAfix benchmark is widely used in setting payout rates on a range of interest rate products. The rates are also used to help value the cash settlement of options on interest rate swaps and other products. Pension funds and local governments often rely on products priced off the benchmark rate to help hedge against future interest rate changes.

In a statement, the CFTC explained that the ISDAFIX US dollar rate is quoted at 11 a.m. where the submitting banks are polled about the rate during a specific period and asked to submit estimates. An average is taken from the contributions, but during the polling window, banks can change their contributions, and thereby affect the published USD ISDAFIX.

How to “muscle the fix at 11”

According to the order, the CFTC said that JPMorgan, one of the panel banks which submitted rates that determined the daily US ISDAfix rate, tried to artificially move the rate through its trading at the 11:00 a.m. fixing in order to benefit cash-settled swaps held by JPMorgan that were priced or valued against the benchmark.

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The CFTC said that traders discussed trades as being based on the ‘jacked price’ and not the ‘fair price,’ and how they had managed to manipulate or “muscle” the USD ISDAFIX to benefit their own positions.

A JPMorgan trader emailed the following instructions to other swaps traders and the bank’s swaps broker employees:

 “At 11:00, I want to hit, lift 10s.  Okay . . . I’ll lift them up.  I’ll play the game for up to 400 . . . I’d like to keep it up at ¼ if I can.  I don’t want bonds to go over fifty so if they go up to fifty bid, I’m a ¼ offer.  If they lift me, they go down immediately.  I’ll, I’ll sell whatever he wants to sell, okay.”

At the time, JPMorgan didn’t have any internal controls to regulate how the submission should be made, a situation that the bank is now required to take specified steps to remedy.

The case against JPMorgan is the latest in a series of broad investigations into the manipulation by big banks of a variety of global benchmark rates. A number of banks have also resolved parallel criminal charges related to the manipulation of various global benchmarks.

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