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HSBC will pay $45 million to address CFTC spoofing and recordkeeping violations

HSBC was fined $45 million as part of a settlement with the Commodity Futures Trading Commission (CFTC) for allegations that its traders engaged in manipulative and deceptive trading practises and that the bank committed recordkeeping errors due to a flawed third-party audio recording platform.

Compliance News & Updates

According to the CFTC's order issued on Friday, registered swap dealer HSBC Bank USA violated the Commodity Exchange Act's anti-fraud, anti-manipulation, and supervision provisions. The bank also failed to comply with recordkeeping rules by failing to respond adequately when a third-party audio recording platform failed to correctly record whole voice calls on some mobile phone calls over a five-month period in 2020, according to the government.

In a second ruling issued on Friday, the CFTC fined HSBC Bank USA, HSBC Securities, and HSBC Bank plc $30 million for admitting recordkeeping and supervisory breaches related employees' use of off-channel conversations for business purposes.

Details of the deceptive trading case: From 2012 to 2015, HSBC traders "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," according to a press release from the CFTC. Traders attempted to manipulate the market in ways that benefited HSBC while harming its counterparties, according to the agency.

In some circumstances, 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," according to the CFTC. The bank is also accused of failing to notify such counterparties in a fair and equitable manner.

In another alleged example, from September 2015 to April 2016, an HSBC trader issued bids or offers for swaps on a swap execution facility and subsequently withdrew those bids or offers before executing them in order to prevent the price from changing unfavourably for the bank. This is referred to as spoofing.

According to the CFTC, HSBC failed to diligently supervise or build and maintain a system to supervise the behaviour of its traders.

Compliance implications: HSBC conducted an internal review of certain additional swaps with bond issuers and directed investigators' attention to relevant electronic communications and audio recordings, as well as information and documents located in foreign HSBC facilities.

The CFTC also ordered HSBC to conduct global, multiyear corrective actions in its fixed income business, including:

  • Improving its governance and control structure

  • Clarifying material order handling, pre-hedging, and spoofing policies and guidelines

  • Formalising its conduct escalation process in order to recognise and manage employee misconduct

  • Strengthening obligatory training for all employees on fixed income

  • Enhancing existing electronic and voice communications surveillance tools.

Case study on off-channel communications: Employees at the three HSBC entities were found to have conducted "business-related communications both internally and externally via unapproved communication methods, including personal text and WhatsApp messages, that were apparently not surveilled and maintained by HSBC," according to the CFTC, from at least 2018 to the present. HSBC's policies and procedures barred workers from using unapproved communication channels during the time period.

According to the agency, it notified HSBC of the flaws in May 2021, after which the bank performed an internal investigation that validated the findings.

The Securities and Exchange Commission (SEC) fined HSBC Securities $15 million on Thursday for similar compliance violations involving employee usage of off-channel communications.

HSBC response: “The bank is pleased to put these matters behind us, and we appreciate that both the SEC and CFTC recognize our commitment to remediating our internal controls when needed,” HSBC said in an emailed statement. “In recent years, we have made significant investments in enhancing our compliance procedures and have worked diligently to maintain the highest standards for professional conduct throughout our organization.”



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