CFTC Gets in on the Glen Point Action Over FX Barrier Trigger
Posted by Colin Lambert. Last updated: August 9, 2023
With The Full FX View
More than three months after the US Department of Justice charged a hedge fund with multiple fraud offences over the alleged triggering of an FX barrier option, the US Commodity Futures Trading Commission (CFTC) has filed charges of its own relating to the conduct.
Glen Point Capital and its co-founder Neil Phillips were charged by the DoJ in September with deliberately attempting to trigger a pay out on a USD/ZAR option through trading aggressively on Boxing Day 2017 in Singapore. The fund received a $20 million payout according to the DoJ, part of which was shared with a client.
The CFTC charges relate to two “large binary option contracts”, according to the regulator, which is seeking civil monetary penalties, disgorgement of any ill-gotten gains, permanent trading and registration bans, and a permanent injunction against further violations of the Commodity Exchange Act (CEA), as charged.
CFTC says the two options combined provided a payout of $30 million and claims Phillips deliberately drove down USD/ZAR to artificial levels on December 25 and 28 (both US time). “Rather than allowing non-manipulative, free market forces to determine whether the USD/ZAR exchange rate would breach the predetermined amounts before the options expired, Phillips took matters into his own hands,” the CFTC alleges.
The Full FX View
In terms of conduct, there is little more to add to the view expressed when the first charges were laid in September, however the CFTC complaint does introduce a second trigger event to the case, and also provides some detail that clarifies, to a degree, some of the questions raised at the time of the DoJ announcement.
Perhaps most pertinently, there were questions as to why it took $725 million to move an illiquid pair like USD/ZAR just over five big figures on probably the least liquid day of the year in FX markets? The CFTC complaint notes that there were “multiple counterparties” to the trades executed by, reportedly, Nomura on behalf of Glen Point, which would suggest that one theory – the writer of the option was defending the level – is wide of the mark. The complaint does note that one US bank was counterparty to five transactions, but above that there is nothing to suggest there was a sustained defence of the level taking place.
The second revelation from the CFTC complaint is that the DoJ was probably being very unfair to the salesperson at the executing bank in its own charges, because it is now clear that person acted in the correct manner. It was clear from the language used that Phillips was keen on getting the market through 12.50, and the salesperson immediately communicated their concerns and suspicions to their supervisor. Equally, the salesperson did, according to the CFTC, caution Phillips that his trading style was likely to cause the market to aggressively move lower, which would dilute his execution quality.
What isn’t clear from the CFTC complaint is what happened after that, it does note an internal review by the bank, but not whether the results of this review, which clearly suspected market manipulation, were forwarded to a relevant authority? In normal times it would seem obvious that the finding of a needle in a haystack, which is what discovering this kind of alleged misconduct, is very unlikely unless the authorities are tipped off, but trading on this scale in early Singapore on December 26, in USD/ZAR, would stand out (CLS data indicates that the $725 million was 70% of flow that whole day in USD/ZAR).
There is one further aspect of this that is notable, although probably irrelevant to the likely court case – USD/ZAR did actually keep going down. The CFTC, as did the DoJ, makes much of the rebound in USD/ZAR on December 26 (Singapore time), something that probably cost Glen Point $2-3 million in losses on the trading, but it is clear that there was a downtrend in place for it was trading at 12.26 just two or three days later.
It would be the ultimate irony if a (buy side) participant in the FX market is found to have manipulated the market when the market was very likely heading in that direction anyway.
As well as introducing the alleged triggering of another one-touch option into the affair, the CFTC charges also cover the post-trade events at the executing bank, previously named as Nomura in Singapore. In its complaint, the CFTC notes that the salesperson who facilitated the $725 million of USD/ZAR sales immediately escalated the issue by contacting their superior and giving full details. The salesperson made it clear to their superior that Glen Point likely had a barrier option tied to 12.50, stating, “We just sold a lot of dollar/rand for Neil. And I was as generic as possible in the chat but it was very clear that he was trying to get a print below 12.50 so he obviously had some kind of barrier there.”
More pertinently, the bank, in its internal review, acknowledged that the salesperson had “received and facilitated a $725m USD/ZAR spot client order in circumstances where the client used language which appeared to suggest an intention to move the market.”
The second option had a trigger at 12.25 with two weeks more to expiry than option one, and on December 28 the pair was trading at 12.27, at which time Phillips is alleged to have contacted the same bank and asked it to sell $100 million. One minute later, the CFTC says the order was cancelled, at which time the bank had sold $21 million at 12.2645.
Hours later, the complaint says Phillips instructed another employee of Glen Point to sell another $100 million when the market was around 12.2550, this was sent to a different salesperson at the same bank. After $35 million was sold, the Glen Point employee stated that the firm wanted USD/ZAR at 12.2490, the salesperson said it had already traded there, and was instructed to stop selling.
In announcing the charges, CFTC acting director of enforcement, Gretchen Lowe, says, “Manipulative and deceptive conduct undertaken in connection with swaps harms market integrity and market participants, and we will take action to hold those who commit this type of misconduct accountable.”