The Commodity Futures Trading Commission has issued orders simultaneously filing and settling charges with affiliates of three financial institutions for a variety of swap dealer activities including failures related to swap data reporting and, in one case, failures related to the disclosure of Pre-Trade Mid-Market Marks (PTMMMs).
The settling financial institutions, charges, and civil monetary penalties are:
- Goldman Sachs (Goldman Sachs & Co. LLC) for failing to diligently supervise a wide range of its swap dealer activities, and for unprecedented failures regarding swap data reporting and the disclosure of PTMMMs in violation of multiple sections of the Commodity Exchange Act (CEA) and CFTC regulations. The order imposes a $30,000,000 civil monetary penalty and includes Goldman taking steps to develop a written remediation plan and retain a consultant to advise on and assess its remediation plan.
- J.P. Morgan (JPMorgan Chase Bank, N.A., J.P. Morgan Securities LLC, and J.P. Morgan Securities plc) (JPM) for violations related to swaps reporting. The order imposes a $15,000,000 civil monetary penalty and other undertakings.
- Bank of America (Bank of America, N.A (BANA) and Merrill Lynch International (MLI)) for failing to diligently supervise swaps reporting and failing to comply with swaps reporting obligations. The order imposes an $8 million civil monetary penalty and other undertakings.
“It now has been 13 years since Dodd-Frank and well past time for swap dealers to ensure they are in full compliance with the CEA and CFTC regulations,” said Division of Enforcement Director Ian McGinley. “As significant reporting failures continue to persist, our resolutions will reflect the gravity of swap dealers’ continuing failures to prioritize compliance and seek to deter future failures. And when appropriate, we will require a neutral third party to advise, assist with, and test the sufficiency of an entity’s remediation.”
Goldman Case Background
The order finds Goldman failed to properly resource and prioritize CFTC compliance. This failure resulted in violations that permeated numerous aspects of Goldman’s swap dealer activities. As a result, Goldman failed to diligently supervise a wide range of its swap dealer activities. These supervisory deficiencies impacted a number of areas: swap data reporting, PTMMM disclosures, a personnel reporting line, clearing member risk management policy, notices regarding its initial margin model and segregation, and disclosure of static material economic terms. These deficiencies were pervasive, and in some instances, have persisted since 2013. In addition, the order notes, this is the first CFTC case with this volume of swaps data reporting (more than twenty million swaps) and PTMMM failures (more than one million PTMMMs), and thus those failures are also the basis for standalone violations of the CEA and CFTC regulations.
The order further finds since the swap data reporting requirements went into effect, Goldman failed to accurately and timely report a significant portion of its swap data to a swap data repository (SDR), as required by CFTC regulations. While Goldman has backreported more than 20 million swaps to date, the CFTC believes this figure significantly underestimates the true scope of the swap data reporting failures at Goldman. In addition, the order states, on more than one million occasions since 2013, Goldman provided counterparties with PTMMMs that were inaccurate or failed to provide a PTMMM entirely.
The order recognizes Goldman’s substantial cooperation with the Division of Enforcement’s investigation in the form of a reduced civil monetary penalty.
The CFTC thanks and acknowledges the assistance of the National Futures Association in this matter. The Market Participants Division, the Division of Market Oversight, the Division of Data, and the Division of Clearing and Risk also assisted with the Goldman case.
The Division of Enforcement staff responsible for this matter are Amanda Burks, Brian Hunt, Kara Mucha, Erica Bodin, Rick Glaser, as well as former Enforcement staff member Phil Tumminio.
JPM Case Background
According to the order, from approximately November, 2017 through the present (the relevant period), JPM did not report more than 40 million swap transactions in a manner consistent with the CEA and CFTC regulations. JPM’s reporting deficiencies during this period, which included both underreporting and misreporting in a manner inconsistent with CFTC rules, violated the CEA and CFTC regulations.
The order finds several of JPM’s reporting failures during the relevant period relate to the underreporting of swap data. Specifically, the order states JPM did not report more than 150,000 constituent FX spot transactions. The order also finds JPM incorrectly classified certain FX forwards as FX spot transactions, causing more than 35,000 FX forwards transactions to not be reported. Further, the order finds JPM failed to report more than 600,000 pre-allocation FX swaps.
In addition, the order also finds extensive misreporting of swap transactions by JPM. For instance, JPM incorrectly reported more than 15 million collateralized FX, rates, and commodity swaps as if they were uncollateralized. The order also finds JPM incorrectly reported the price-notation field for at least six million pre-allocated equities swaps. Further, the order finds JPM did not correctly report pre-allocated trades for at least 20 million cross-currency equity swaps.
In accepting JPM’s offer of settlement, the CFTC recognizes JPM’s substantial cooperation during the Division of Enforcement’s investigation of this matter. The CFTC also acknowledges JPM’s representations concerning its remediation in connection with this matter. The CFTC notes JPM’s cooperation and remediation are recognized in the form of a reduced civil monetary penalty.
The Division of Enforcement staff responsible for this matter are Lauren Bennett, Jason T. Wright, A. Daniel Ullman II, and Paul G. Hayeck.
Bank of America Case Background
According to the order, since approximately 2015, BANA and MLI did not report millions of swap transactions as required by the CEA and CFTC regulations. Specifically, BANA and MLI failed to report or correctly report nearly four million swap transactions to swap data repositories. These reporting failures were caused by 25 types of errors that principally involved swap allocations which are (normally) post-trade events where an agent allocates a portion of an executed swap to clients who are the actual counterparties to the original transaction.
The order also finds BANA and MLI did not provide adequate supervision from approximately 2015 to ensure they complied, timely, with their swap dealer data activity and reporting obligations pursuant to the CEA and CFTC regulations.
JEFFREY NEWMAN IS A WHISTLEBLOWER LAWYER WHO CAN BE REACHED AT JEFF@JEFFNEWMANLAW.COM
