CFTC Says Enforcing Risk-Management Rules Is a Priority
In a first, swaps regulator charges the bank with violating risk-management regulations put in place after the financial crisis
The Commodity Futures Trading Commission for the first time charged a bank with violating risk-management rules adopted after the financial crisis, a signal to the industry to bolster internal controls in their swaps businesses.
The CFTC late Tuesday said it charged a U.S. subsidiary of London-based HSBC HoldingsPLC with violating rules that require financial institutions to establish a governing body and internal policies to oversee data reporting for swaps dealers. HSBC agreed to pay $650,000 to settle the case, which also included allegations of reporting failures.
The CFTC adopted its risk-management rules in the wake of the financial crisis, alongside a host of other requirements for swaps dealers. Swaps are bets on the direction of interest rates, commodities and other assets.
The enforcement action shows the regulator underscoring the importance of postcrisis rules that otherwise haven’t received much attention among the wave of changes adopted under the 2010 Dodd-Frank financial-regulatory overhaul, according to Aitan Goelman, a former enforcement director at the CFTC.
“There is a concern that they become [viewed as] mere suggestions,” said Mr Goelman, who left the CFTC in 2017 and is now a partner in the white-collar-defence practice at Zuckerman Spaeder LLP. “I think this is an illustration of the CFTC saying, ‘No, guys. You really have to follow this.’”
The CFTC described its settlement with HSBC as part of a continuing effort to ensure swaps dealers have strong internal controls in place.
“The commission’s swap-dealer risk management rules are designed to monitor and regulate systemic risk endemic to the swaps market,” said James McDonald, director of the CFTC’s enforcement division, in a press release announcing the case.
At issue in the HSBC case—and other enforcement actions involving swaps reporting—is the CFTC’s ability to collect accurate data about a large financial market that was largely opaque before Dodd-Frank, attorneys said.
According to the settlement, HSBC’s U.S. division from January 2013 until November 2015 had no governing body in place to identify and manage swaps-related risks. Additionally, the bank approved risk-tolerance limits and policies for its swaps business as part of broader reviews across its business lines, rather than separately as a stand-alone unit, the agency said.
“We have since improved all relevant systems and processes,” HSBC spokesman Rob Sherman said in an email.
The bank didn’t admit or deny the regulator’s findings, according to the settlement.
The case sends a message to swaps dealers, several of which have been fined by the CFTC in recent years for faulty data reporting, said Michael Spafford, a partner in the investigations and white-collar-defence practice at Paul Hastings LLP.
“It’s not just a question of having the systems in place,” Mr Spafford said. “They have to be supervised.”
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