Mizuho Capital Markets (MCM) agreed to pay more than $6.8 million to settle charges from the Commodity Futures Trading Commission (CFTC) it failed to adequately disclose its pre-trade activity on certain foreign exchange forward transactions that disadvantaged its customers.
The CFTC said Tuesday in a press release the conduct of MCM, a New York-based swap dealer, constituted trade practice violations of the swap dealer business conduct standards in the Commodity Exchange Act and agency regulations.
Without admitting or denying the CFTC’s allegations, MCM agreed to pay a $5 million fine, more than $1.8 million in restitution to affected customers, and to cease and desist from future violations.
The details: From 2018-20, MCM did not inform customers it was engaging in pre-trading activity on exchange forward transactions “in the minutes or seconds before MCM provided the spot exchange rate to, and executed the forward transaction with, the client,” the CFTC said in its order.
“This trading by Mizuho, at times, likely contributed to moving the spot exchange rate, in the relevant currency pair, against the customer,” the agency said in its press release. The activity might have resulted in the customer receiving a less favorable rate while also allowing Mizuho to hedge its exposure and receive a rate more favorable than otherwise might have been available, the CFTC said.
As a result, customers could not adequately assess how the activity disadvantaged them, the CFTC said. MCM failed to communicate with its customers in a fair and balanced manner and failed to diligently supervise its business as a swap dealer, the agency said.
Compliance considerations: The CFTC said despite MCM having policies that all pre-trading be “undertaken fairly and with transparency in a manner that is not meant to disadvantage the client or disrupt the market,” it did not review trades for meeting this requirement.
An internal audit conducted after the pre-trading in question concluded, “[B]ecause there was no system in place at the time to identify pre-hedging trades for evaluation, ‘Pre-hedging may not be performed fairly or transparently, resulting in adverse outcomes for clients or unmitigated conflicts of interest,’” the order said.
Starting in February 2022, MCM implemented new policies and procedures requiring traders to flag pre-hedging trades, allowing the trade supervisor to identify and review trades for potential disadvantages to the customer and escalate concerns to the firm’s compliance personnel if warranted.
In October, MCM updated the pre-hedging disclosure on its website to specify pre-hedging “‘may be executed … before—including but not limited to, within the seconds and minutes before—during, or after the pricing or consummation of any directly or indirectly related transactions between Mizuho and you,’” the CFTC said.
The agency earlier this month fined Goldman Sachs $15 million for violations of swap dealer business conduct standards that involved Goldman’s alleged manipulation of the execution of same-day swaps to the detriment of unsophisticated clients and for failing to accurately disclose the actual cost of those swaps.
A spokesperson for Mizuho Group declined to comment.