In three enforcement orders entered between 27 September and 29 September, the Commodity Futures Trading Commission (“CFTC”) showed its attention to swap dealers’ failures to report or disclose information required by regulation. Provisionally registered swap dealers felt the CFTC’s disapprobation for failing to report legal entity identifiers or privacy-shielded entity identifiers accurately to swap data repositories (Citibank, N.A. and Citigroup Global Markets Limited), failing to provide pre-trade information or daily mid-market marks or providing inaccurate marks to counterparties and swap data repositories (Société Générale), or for failing to provide daily marks or mark methodology or conduct portfolio reconciliation (Mizuho Capital Markets LLC). In each order entered, the CFTC noted each provisionally registered swap dealer’s failure to adequately supervise its process.
In September 2017, Citibank, N.A. and Citigroup Global Markets Limited (together, “Citi”) entered a settlement order with the CFTC because Citi failed to report legal entity identifiers, or privacy-law-compliant entity identifiers, for tens of thousands of swaps between 2015 and 2016. Citi paid the CFTC a civil monetary penalty of $550,000 and was to enhance their reporting process with respect to legal entity identifiers and privacy-law identifiers, along with their correction process for information inaccurately submitted to swap data repositories. The CFTC order entered September 27, 2021 describes Citi’s failures to remediate or to correct that legal entity identifier reporting process. Citi’s failures began in September 2017 and continued until “at least September 2020”. Further, Citi used a service provider to report swaps where privacy laws prevented disclosing the underlying entity’s actual legal entity identifier in real time but failed to correctly mask those identities between 2013 and 2019. This failure to correctly mask identities affected tens of thousands of swaps. Despite that and Citi’s violation of a previous consent order, this consent order imposed a $1,000,000 fine.
According to the September 29, 2021 consent order the CFTC entered into with Société Générale, Société Générale failed to disclose daily marks to between 28-48% of its counterparties each year from 2013 through March 2019. Further, Société Générale failed to disclose pre-trade mid-market markets for over 31,000 FX swaps with fourteen counterparties conducting trades over trading platforms between 2014 and “at least 2020”. Despite acknowledging that Société Générale had self-reported, the consent order required a fine of $1,500,000.
Mizuho Capital Markets LLC (“Mizuho”) apparently failed to conduct portfolio reconciliation with non-swap dealer counterparties from around 2013 until “at least April 2021”. Indeed, before December 2019 it appears that Mizuho failed to conduct portfolio reconciliation with 87% of its non-swap-dealer counterparties. Mizuho lacked procedures describing or requiring portfolio reconciliation and relied on a manual process. Mizuho’s compliance testing also missed the mark, failing to recognize this gap in compliance until March 2019. In addition, the CFTC found that Mizuho “repeatedly failed to disclose daily marks, as well as the methodology and assumptions used” to calculate those daily marks. Mizuho’s internal compliance team again is called out by the CFTC, here for failing to conduct any testing of daily mark processes for at least four years. Perhaps inevitably in light of the other process failures described, Mizuho also failed to report accurately to swap data repositories for over 17,500 foreign exchange and interest rate swaps. Although noting that Mizuho cooperated and attempted to mitigate these failures, Mizuho’s fine in connection with its September 27, 2021 settlement order was $1,500,000.
For more details about these CFTC enforcement actions, visit https://www.cftc.gov/LawRegulation/EnforcementActions/index.htm