HSBC Hit With “Deeply Troubling” Spoofing Fine

The US Commodity Futures Trading Commission has issued an order simultaneously filing and settling charges against HSBC Bank USA for manipulative and deceptive trading related to interest rate swaps with bond issuers and spoofing – conduct a CFTC commissioner has called “deeply troubling”.

The CFTC also charged the bank over supervision and mobile device recordkeeping failures at various times during approximately an eight-year period and levied a $45 million fine. HSBC says it has already undertaken and continues to undertake extensive remedial measures, as described in the order.

The order relates to activity between approximately March 2012 to July 2020 and the CFTC says on multiple occasions between March 2012 and 2015, traders at HSBC engaged in and attempted to engage in manipulative and deceptive trading in interest rate swaps, basis swaps, and swap spreads in connection with interest rate swaps that HSBC entered into with bond issuers (issuer swaps).

The issuer swaps were priced in part based on prices displayed on pricing screens controlled by inter-dealer broker firms, the order says, revealing that HSBC traders “intentionally traded at the broker firms controlling the relevant screens during telephonic pricing calls in which the bond issuances, and the related issuer swaps, were priced”.

The order also says HSBC traders structured their trading intentionally to move prices for the relevant swaps on these screens, and engaged in this conduct to increase the profitability of issuer swaps for HSBC to the detriment of the bank’s counterparties.

In essence, the order finds, “HSBC used its counterparties’ material confidential information about the timing and pricing of issuer swaps in a way that was materially adverse to the interests of its counterparties”.

It adds HSBC also did not communicate with its counterparties in a fair and balanced manner based on principles of fair dealing and good faith. “At times, supervisors and senior management at HSBC or its affiliates knew of, and even directed, HSBC traders to engage in this conduct,” the order states.

Furthermore, from September 2015 to April 2016, HSBC, through the trader who supervised its US dollar swap desk, engaged in spoofing in the voice-brokered swaps market on a number of occasions. “The trader placed bids or offers for swaps on a swap execution facility, which is a registered entity, with intent to cancel those bids and offers before execution,” the order states. “The trader engaged in this conduct to control prices on the broker’s pricing screen by placing spoof orders intended to prevent the relevant price from moving in a direction unfavourable to HSBC and then immediately cancelling those orders.

“HSBC failed to diligently supervise, or establish and maintain a system to supervise, the conduct of its traders with respect to the manipulative and deceptive trading and spoofing as described in the order,” it adds.

The order also finds the bank had a three-month gap in its ability to record calls made on mobile devices. The bank has recorded these calls since 2014, using the services of a vendor, but from at least March 2020 to July 2020, due to a recording failure, HSBC failed to make and keep required recordings of mobile phone calls that contained oral communications that led to the execution of swaps and related cash and forward transactions.

In a statement released by CFTC, commissioner Kristin Johnson says HSBC’s activity constitute “severe betrayals” of client trust, and is “deeply troubling”.

Johnson adds, “While I recognise that determining an appropriate penalty is more an art than a science, I sincerely hope that market participants understand the seriousness with which we view these sorts of violations by registrants and take note that similar misconduct in the future will likely be met with even more significant penalties.”