HSBC to pay $45M to settle CFTC spoofing, recordkeeping violations

Registered swap dealer HSBC Bank USA violated the Commodity Exchange Act’s anti-fraud, anti-manipulation, and supervision provisions, the CFTC said Friday in its order. The bank also failed to adhere to recordkeeping provisions by not adequately responding when a third-party audio recording platform did not properly record entire voice calls on certain mobile phone calls over a five-month period in 2020, the agency said.

In a separate order Friday, the CFTC fined HSBC Bank USA, HSBC Securities, and HSBC Bank plc $30 million for admitted recordkeeping and supervision failures regarding use of off-channel communications by employees for conducting business.

Deceptive trading case details: On various occasions from 2012-15, 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,” the CFTC said in a press release. Traders attempted to move the market in a way that was better for HSBC and worse for its counterparties, the agency noted.

In some cases, 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,” the CFTC said. The bank also allegedly did not inform those counterparties in a fair and balanced manner.

In another alleged case, from September 2015 to April 2016, an HSBC trader placed bids or offers for swaps on a swap execution facility and withdrew those bids or offers before executing them to prevent the price from moving unfavorably for the bank. This practice is considered spoofing.

HSBC failed to diligently supervise or establish and maintain a system to supervise the conduct of its traders, the CFTC said.

Compliance ramifications: HSBC undertook an internal review of certain additional swaps with bond issuers and drew investigators’ attention to electronic communications and audio recordings that were relevant to the investigation, as well as information and documents located in foreign HSBC facilities.

The CFTC ordered HSBC to also undertake global, multiyear remedial measures related to its fixed income business by:

• Enhancing its governance and control framework;
• Clarifying policies and guidance on material order handling, pre-hedging, and spoofing;
• Formalizing its conduct escalation process to identify and manage employee misconduct;
• Strengthening mandatory training for all fixed income employees; and
• Enhancing existing surveillance tools for electronic and voice communications.

The CFTC said it reduced HSBC’s penalty because of its “substantial cooperation” with the investigation and “appropriate remediation.”

Off-channel communications case details: From at least 2018 to the present, 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,” the CFTC said. During the period, HSBC’s policies and procedures prohibited employees from using unapproved communication methods.

The agency said it notified HSBC of the failings in May 2021, after which the bank conducted an internal review that confirmed the findings.

On Thursday, HSBC Securities was fined $15 million by the Securities and Exchange Commission (SEC) for similar compliance failures regarding employee use 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.”