Key Takeaways: CFTC’s FY 2021 Swap Dealers Enforcement Actions

In Fiscal Yr 2021 (FY 2021), the Commodity Futures Buying and selling Fee (CFTC) introduced and settled 5 enforcement actions towards swap sellers for alleged reporting, disclosures and supervision failures. Traditionally, the CTFC’s swap vendor actions have targeted on reporting necessities, and whereas FY 2021 was no completely different, this 12 months noticed an elevated concentrate on exterior enterprise conduct disclosures in addition to considerably lowered penalties to replicate self-reporting, cooperation and remediation.

FY 2021 Swap Seller Enforcement Actions

  • In re Credit score Suisse (No. 21-11, June 25, 2021)

    • Credit score Suisse acquired a $1.5 million penalty for purportedly failing to report roughly 14 p.c of their general reportable swaps’ each day mid-market mark valuations (each day mark) to their swap information repository (SDR) between 2013 and 2018. Credit score Suisse didn’t obtain remediation, cooperation or self-disclosure credit score.

  • In re Citibank, N.A. and Citigroup International Markets Restricted (No. 21-15, Sep. 27, 2021)

    • Citi acquired a $1 million penalty for its alleged failures between 2013 and 2017 associated to (1) reporting Authorized Entity Identifiers (LEIs) correctly for tens of 1000’s of swaps; (2) satisfying no-action reduction necessities associated to LEI reporting for over 100 thousand swaps; and (3) supervising their swap vendor actions diligently. The CFTC charged that Citi violated a stop and desist provision stemming from a 2017 CFTC enforcement motion that concerned comparable LEI reporting errors however nonetheless lowered the penalty to replicate Citi’s substantial cooperation and remediation.

  • In re Mizuho Capital Markets LLC (No. 21-17, Sep. 27, 2021)

    • Mizuho acquired a $1.5 million penalty for claimed failure to (1) have interaction in correct portfolio reconciliation with non-swap vendor counterparties; (2) disclose each day marks, and associated methodology and assumptions, to counterparties eligible for the each day mark; (3) precisely and well timed report back to its SDR; and (4) preserve an sufficient supervisory system. Mizuho’s purported reporting and supervisory failures passed off at varied occasions between 2013 and 2021. The CFTC’s recognition of Mizuho’s self-disclosure, substantial cooperation and remediation resulted in a considerably lowered penalty.

  • In re Société Générale S.A. (No. 21-36, Sep. 29, 2021)

    • SocGen acquired a $1.5 million penalty for purportedly (1) failing to reveal each day marks to eligible counterparties; (2) reporting inaccurate each day marks to counterparties and inaccurate swap valuation information to its SDR; (3) failing to reveal pre-trade mid-market marks (PTMMM) to counterparties on sure platforms; and (4) not sustaining an sufficient supervisory system. SocGen’s alleged reporting and supervisory failures passed off at varied occasions between 2013 and 2021. The CFTC considerably lowered the penalty to replicate SocGen’s self-disclosure, substantial cooperation and remediation.

  • In re Cargill, Inc. (No. 21-37, Sep. 30, 2021)

    • Cargill acquired a $750,000 penalty for allegedly failing to incorporate new swaps in its giant dealer experiences (LTRs) for reportable positions in addition to its Kind 102S submissions from 2017 to 2019, submitting LTRs with incorrect values for a number of months in 2019, and failing to oversee its reporting obligations. The CFTC’s recognition of Cargill’s self-reporting and remediation resulted in a lowered penalty.

Not one of the above issues concerned litigated selections. Every of the above actions had been resolved via a settlement by the respondent with out admitting or denying any of the CFTC’s findings or conclusions.

Key Takeaways

1. Self-Disclosure, Cooperation and Remediation Stay a Precedence

In comparison with FY 2020, the variety of enforcement actions towards swap sellers remained the identical, with 5 whole actions. Nonetheless, the 5 FY 2020 actions resulted in almost $75 million in whole penalties whereas FY 2021’s enforcement actions resulted in solely $6.25 million in whole penalties. The numerous distinction is attributable to the rising development of self-reporting, cooperation and remediation. Of the 5 actions introduced and settled in FY 2020, there have been no actions that concerned self-reporting and just one swap vendor acquired cooperation credit score that resulted in a lowered penalty.

Originally of the final fiscal 12 months, on October 29, 2020, the CFTC’s Division of Enforcement issued a memorandum that articulated how self-reporting, cooperation and remediation might end in lowered financial penalties. Particularly, the memorandum supplied 4 situations:

  • No self-reporting, cooperation or remediation ends in no lowered penalty.

  • No self-reporting, however cognizable cooperation and/or remediation that warrants recognition however ends in no lowered penalty.

  • No self-reporting, however substantial cooperation and/or remediation ends in a lowered penalty.

  • Self-reporting, substantial cooperation and remediation ends in a considerably lowered penalty.

This steerage appeared to assist the CFTC and events navigate the extent of cooperation and the discount in penalties this 12 months. In comparison with FY 2020, there was a major distinction in FY 2021: 4 of the 5 swap vendor enforcement actions concerned lowered financial penalties, three of which additionally concerned self-reporting.

2. A New Deal with Exterior Enterprise Conduct Disclosures

FY 2021 continued the historic development of swap vendor enforcement actions regarding purported violations of swap vendor reporting guidelines, with all 5 actions involving alleged reporting failures. Through the years, the CFTC has reiterated that reporting is on the coronary heart of its market surveillance efforts. Nonetheless, in contrast to years previous, the CFTC additionally targeted on exterior enterprise conduct disclosures in FY 2021.

The three largest monetary penalties — at $1.5 million every — concerned each day mark and PTMMM disclosures with alleged failures courting again to 2013 in all three instances. In prior years, the CFTC solely introduced costs associated to PTMMM and each day mark disclosures on two events. First, the CFTC settled an motion towards Cargill on November 6, 2017, leading to a $10 million penalty; the second motion was settled towards The Financial institution of Nova Scotia on August 19, 2020, leading to a file $50 million penalty. In each situations, the massive monetary penalties mirrored substantial alleged misconduct past a failure to satisfy the swap sellers’ disclosure obligations.

The CFTC’s heavy concentrate on these two counterparty disclosures of knowledge reveals the company’s emphasis on making certain swap vendor counterparties have correct and up-to-date info in order that they’re well-informed each previous to execution and in the course of the lifetime of a swap. These enterprise conduct requirements require swap sellers to reveal sure info (comparable to materials incentives, strategies of calculation, and conflicts of curiosity) to counterparties in an effort to preserve honest and balanced transactions and general market integrity.

3. Supervision Prices Possible Observe With Violations

In FY 2021, by bringing supervisory costs towards 4 out of the 5 swap sellers, the CFTC continued to focus on the significance of getting in place sufficient compliance packages to forestall misconduct, rapidly detecting misconduct when it happens, and responding in a method that ensures that the identical failures is not going to reoccur. The Fee has constantly introduced supervisory costs in tandem with different swap vendor violations as a result of it believes that the failure to take care of sufficient supervisory techniques and controls causes, or at the least doesn’t forestall, the underlying violation. The failure to oversee costs are also used to sign the place swap vendor controls are purportedly missing and the place the swap vendor ought to focus compliance efforts shifting ahead.

The Fee stays significantly involved with how lengthy errors go undetected and whether or not the topic of the enforcement motion ought to have realized of the purported error sooner. Proof that the swap vendor knew or ought to have recognized of an alleged flaw could end in a scathing order and a extra important monetary penalty.

Moreover, the CFTC pays shut consideration to failures it claims are reoccurring. Over the last CFTC fiscal 12 months, alleged recidivism performed a considerable position in Citi’s $1 million penalty for reporting failures associated to a single LEI error. That is the third time that Citi’s swap vendor has been the topic of a CFTC enforcement motion; one of many actions settled towards Citi in 2017 particularly concerned purportedly comparable LEI reporting errors. In gentle of this historical past, the CFTC penalized Citi as a result of it claimed the agency didn’t supervise its third-party vendor to make sure that the identical LEI violations didn’t reoccur.

Whereas a swap vendor’s actions after detection of a reporting or different compliance failure could considerably cut back the final word penalty, it is not going to forestall a CFTC enforcement motion. Enough staffing and coaching of personnel; automated controls and processes to cut back human error; controls which are topic to common testing; and particular insurance policies and procedures that workers comply with are preventative measures that swap sellers ought to take to keep away from supervisory costs.


Samantha B. Taylor, an affiliate within the Litigation apply, contributed to this advisory.

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