CFTC COMMISSIONER O'MALIA'S DISSENTING STATEMENT ON CUSTOMER PROTECTION ENHANCEMENTS IN DERIVATIVES MARKET

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION 
Dissenting Statement of Commissioner Scott D. O’Malia, Enhancing Protections Afforded Customers and Customer Funds Held by Futures Commission Merchants and Derivatives Clearing Organizations1

October 30, 2013

I respectfully dissent from the Commission’s approval today of the final Customer Protection Rules.

I supported the proposed rules because I wanted to solicit public comment and engage market participants in an open discussion about how the Commission should improve its customer protection regulatory oversight.

In the wake of the global financial crisis, it is extremely important to intensify regulatory efforts to strengthen customer protection policies in order to promote the financial stability of the derivatives markets. There is no dispute customer protection must be the cornerstone of the Commission’s oversight. Sound customer protection policies and measures, such as the electronic customer verification confirmation services will improve the efficiency and transparency of financial markets.2

The Commission must promulgate workable regulations that provide clear guidance to industry participants and ensure cost-effective access to markets. Such regulations must be designed to address real weaknesses in the current regulatory regime and allow industry participants to continue with well-established industry practices that had nothing to do with the financial crisis or the recent bankruptcies of MF Global and Peregrine Financial.

Unfortunately, the Commission’s customer protection rules fall short of these objectives. Instead of mitigating customer risk, the rules create a false sense of security by imposing broad and ambiguous requirements and introducing another layer of governmental oversight. Even worse, they force a change in a longstanding and generally accepted industry practice that will likely result in seriously harmful consequences for small FCMs and their end-user customers.

I do support several provisions that allow customers greater insight into the operations of an FCM. These provisions include: an improved FCM disclosure regime that will give customers new and critical information about their FCM exposures, elimination of the alternative method of calculating segregation requirements for §30.7 funds (treatment of foreign futures or foreign options), improved reporting of segregated fund balances, and enhancements to risk management procedures. However, I am unable to support the final rule for the reasons stated below.

Reinterpretation of the residual interest deadline will result in costly prefunding of margin payments.

My main concern with the final rules is their radical reinterpretation of the longstanding residual interest deadline. This reinterpretation decreases the time in which customers’ margin calls must arrive to their FCM from the current three days to just one day.

Such a change would mean a drastic increase in pre-funding of margin, perhaps nearly double the amounts currently required. As a result, many small agribusiness hedgers will have to consider alternative risk management tools or, even worse, will be forced out of the market.3 I am disappointed that yet again the Commission has rushed to implement a rule that disregards the express Congressional directive to protect end-users.

I recognize that the Commodity Exchange Act (CEA) does not permit an FCM to use the money or property of one customer to margin the futures or option positions of another customer.4 Despite this fact, it has been the prevailing industry practice authorized by the Commission for decades.

To the extent that the Commission must reinterpret this statutory provision, I believe this reinterpretation must be based on the thorough analysis of the market data and the full evaluation of the costs of strict compliance with the statute before implementing policy changes, and not after as is the case with the residual interest deadline.

The residual interest deadline rule makes no effort to respond to the commenters’ concerns that the residual interest deadline would be especially costly for smaller FCMs and end-users.5 Given the express Congressional directive to protect end-users, I would have expected the Commission to conduct meaningful cost-benefit analysis to justify the costs when compared to the actual risk to customer accounts and the derivatives markets and to explain why the Commission could not have adopted an alternative approach. Regrettably, the Commission has failed to do so.

Even the Commission’s own cost benefit analysis points out, while significantly understating the impact, that:

“Smaller FCMs may have more difficulty than large FCMs in absorbing the additional cost created by the requirements of the rules (particularly §1.22). It is possible that some smaller FCMs may elect to stop operating as FCMs as a result of these costs.”6

I cannot support a rule that will impose such onerous costs and compliance burdens on the smallest FCMs and small, non-systemically relevant customers.

Finally, although I support a phase-in compliance schedule for the residual interest deadline, I am disappointed that the Commission, in deciding whether to change the deadline at a future time, is not required to make such a decision based on data. Instead, the Commission will simply come up with another arbitrary residual interest deadline that has nothing to do with customer or FCM risk exposure.

Yet again, the Commission has chosen to avoid fact-based analysis. I strongly believe that the Commission should utilize facts and data to make an informed decision about the appropriate time for the residual interest deadline.

The rules fail to provide a clear standard for compliance.

In addition to my serious concerns about the final rules’ treatment of the residual interest deadline, I am concerned that the rules unreasonably expand the scope of the new regulatory compliance regime without providing a clear regulatory objective.

For example, the rules require that a Self-Regulatory Organization (SRO) supervisory program “address all areas of risk to which [FCMs] can reasonably be foreseen to be subject (emphasis added).”7 This broad language requires the SRO to guess at what criteria the programs would be measured against, and under what framework the SRO would make this determination. In short, the new language does nothing but adds more ambiguity to the SRO’s customer protection program and increases the cost of compliance with vague requirements.

Examination experts do not add value to the customer protection regime.

I also have concerns about the requirement that each SRO supervisory program of its member FCMs be reviewed by an “examinations expert.”8 I question the benefit of this requirement given the fact that the Joint Audit Committee (JAC) currently performs this function. The JAC’s primary responsibility is to oversee the practices and procedures that each SRO must follow when it conducts audits and financial reviews of FCMs. This regulatory task is already in place and implemented in a less costly and more efficient manner than set forth in the final rules.

Moreover, in light of the Commission’s regulatory oversight of all SROs and the Commission’s review of all JAC examination programs, this additional layer of review does not provide any benefit except for isolating the Commission from its primary responsibility to oversee customer protection programs.

Customers deserve better protections in bankruptcy proceedings

Going forward, the Commission should address key customer protections in the areas of bankruptcy. Congress should make changes to the Bankruptcy Code to ensure that certain bankruptcy protections are afforded to FCM customers. Specifically, Congress should amend the pro-rata distribution rules in bankruptcy. Despite the Commission’s customer segregation requirements, individual customer accounts are still subject to a pro-rata distribution in bankruptcy. In addition to these changes to the Bankruptcy Code, the Commission should amend its rules to allow the Commission to appoint a trustee to oversee derivatives customers’ accounts in the bankruptcy of a broker-dealer FCM.

Conclusion

I support implementation of a rigorous customer protection program that provides clear and meaningful mechanisms for mitigating customer risks. However, the customer protection rules approved today have missed the mark.

In sum, many of the new rules impose overly broad and nonsensical regulatory requirements and, in doing so, impede the industry’s ability to operate in an efficient manner. Regrettably, the negative effects will be felt most by farmers and other end-users, whose ability to hedge risk in a cost-effective manner will be hampered if not eliminated altogether. This is contrary to the Congressional directive, and I cannot support rules that result in such an outcome.

1 “Customer Protection Rules”

2 In this regard, I applaud the efforts of the Chicago Mercantile Exchange Inc. (CME) and the National Futures Association (NFA) to protect customer accounts by introducing daily electronic confirmation services. This new technology allows CME and NFA to review balances held at bank depositories and compare the balances with customer account information provide by futures commission merchants (FCMs).

3 See e.g.; National Grain and Feed Association Comment Letter at 2 (Dec. 28, 2012) (stating that the Commission’s proposed changes “could have the unintended impact of disadvantaging smaller and mid-size FCMs that provide ‘hands-on’ service to many of the relatively smaller hedgers in agribusiness”); Texas Cattle Feeders Association Comment Letter (Jan. 14, 2013) (warning that such changes “could have the potential to cause unintended consequences such as added costs eventually borne by customers”); Iowa Cattlemen’s Association Comment Letter (Feb. 15, 2013) (“it is imperative that the CFTC understand all sizes of businesses . . . [in order to have] . . . a better opportunity to write rules that provide a logical fit. Our fear is that if this rule is put in place, we will have members who will not take advantage of the risk management tools . . ..”).

4 CEA § 4d(a)(2).

5 Futures Industry Association Comment Letter at 16 (Feb. 15, 2013).

6 Customer Protection Rules at 313.

7 § 1.52 (c)(2).

8 § 1.52.

CFTC COMMISSIONER WETJEN'S STATEMENT REGARDING CONSUMER PROTECTIONS IN THE DERIVATIVES MARKETPLACE

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION 
Statement of Commissioner Mark P. Wetjen, Public Meeting of the Commodity Futures Trading Commission
October 30, 2013

Thank you Chairman Gensler. And my thanks to the professional staff for their hard work on the important final rule we are considering today regarding customer protection.

Customer Protection

The CFTC's core mission is to protect futures and swaps customers from fraud, manipulation, abusive practices and systemic risk. In pursuing this mission, it is vital that the commission unceasingly look to update and improve the protections we have in order to better protect the public and ensure the safety, soundness, and integrity of those operating in the derivatives marketplace.

The final customer protection rule before us today requires important improvements to a range of protections that have been implemented by the commission and industry in recent months. It fills certain remaining regulatory gaps to prevent future failures in the FCM community, and enhances nearly every protection afforded customers of FCMs in the futures and cleared-swaps markets. Customers will benefit from enhancements to FCM risk management programs, modernized audit programs and streamlined measures that will better insulate customers from fellow customer risk.

Residual Interest

The residual-interest provisions have been the most discussed part of the proposal. The commission received a significant number of comment letters in response to that proposal, which would have required FCMs to maintain “at all times” enough residual interest in their segregated accounts to cover all customer margin deficits. That approach was intended to limit fellow-customer risk by ensuring that one customer would in no circumstance be responsible for unwittingly covering another customer’s margin obligations.

Although the proposal offered one permissible construction of the Commodity Exchange Act, it suffered from some practical shortcomings. Those practical shortcomings, in my judgment, are appropriately addressed in the document before us today.

For example, many suggested that the “at all times” requirement under the proposal likely would have imposed significant capital costs on FCMs, which could have led to the unintended effect of limiting access to the derivatives markets. Many contended that this would be too high a price to pay when measured against the corresponding benefit of mitigating fellow-customer risks. The commission has considered these comments and has taken a different approach in today’s release.

The compromise reflected in the final rule is intended to usher in improvements to margin-collection practices over time and to protect access to the markets for a broad cross-section of participants. As a general matter, I strongly support improvements to the residual-interest requirements because of the critical policy objectives they are designed to achieve. First, they will better protect the excess segregation funds of a customer in the event of an FCM bankruptcy. Second, they will encourage FCMs to more actively monitor customer accounts for instances when those accounts are under-margined. And third, they will incentivize FCMs to address those circumstances when an account is under-margined. Together, these enhancements will better protect the safety and soundness of the FCM.

Importantly, the commission has given itself sufficient time to evaluate the FCM community’s progress in implementing the residual-interest policy in the final rule, and to change course if necessary. Indeed, the phased compliance schedule provided in today’s release was a critical component of getting to this final compromise on residual interest.

That compromise is reasonable and measured. For one year, there will be no change to current practice with respect to the treatment of residual interest. After that year, FCMs will be required to comply with the residual-interest requirement as of the close of business on the day following the margin-deficit calculation. This is a necessary and significant change to current market practice.

Thirty months after today’s release is published, commission staff is obligated to conduct a study determining the feasibility, costs and benefits of moving the residual-interest deadline to the completion of the first clearing-settlement cycle following the trade date. The study will be published for public comment, and a public roundtable will be held to solicit the views of market participants.

Finally, after five years, the residual-interest requirement will move up to the first clearing settlement cycle of the day, typically first thing in the morning, should the commission choose not to change course based upon recommendations in the study or in reaction to public feedback at the roundtable.

To be sure, if this end-state were implemented today it would no doubt create a significant cost to FCMs and to market participants. The five-year phase-in period, however, provides the industry an opportunity to streamline margin-collection practices and to take advantage of any technological solutions that may be developed in the meantime.

Equally important, today’s release ensures that future residual-interest requirements will not be imposed on the FCM community if the facts on the ground regarding feasibility and cost do not support it. It is important to note that the study and roundtable are not optional but rather mandated by law, which means that the newly updated information will be brought to the commission before the phase-in period would end.

If the commission decides that it is appropriate to change the residual-interest deadline, the commission may act nimbly and implement a new compliance schedule for that deadline by order, without the procedural hurdles of notice and comment. I am confident that if the commission is presented with convincing facts through this process, it will be compelled to respond appropriately.

All stakeholders in today’s release – including policymakers, FCMs and their customers – rightly anticipate that new services and technologies will provide solutions to today’s compliance challenges. I know that all of us not only welcome those advancements but hope they are brought to market as quickly as practicable. The approach of this rulemaking appropriately incentivizes that outcome.

For that reason, I anticipate that technological solutions will facilitate compliance with residual-interest requirements in the near future for those who could not comply today. I must point out that the comment file to this rule suggests that the vast majority of the marketplace could comply with more abbreviated timelines for margin calls and payments today.

I also anticipate that the flexibility built into this final rule will help avoid the less desirable, alternative methods of compliance suggested by commenters, including self-funding or pre-funding residual interest or margin obligations, as some have predicted. To be more clear, I strongly prefer, and indeed expect, that FCMs will not pursue these options in order to comply with today’s release. This judgment is based in part on the rapid advancement in settlement solutions in recent years, as well as the fact that the latter options may not – all things considered – be as commercially viable.

The expense of pre-funding margin accounts was a special concern of the agricultural community raised in their comments. I spent many days with agricultural producers over the last several months, discussing this issue and others. I met with a number of producers in my home state of Iowa who actively use the derivatives markets to hedge their production risks. I have listened to and carefully considered their concerns about the residual-interest requirement. Today’s release takes those concerns into account, and I believe that their most-pressing fears will not be realized because of this rule.

Meanwhile, even today producers can make intra-day margin payments to FCMs through banking or credit relationships once a margin call is received. Based on what I have learned over recent months, these types of relationships are at a minimum common in the producer community, and seemingly the norm for larger producers. For those producers who do not currently rely on these services, again, I expect other solutions to payment settlement will be offered, or producers will in time embrace those already available, with marginal added expense to them.

I also would like to clarify that today’s release does require FCMs to take a capital charge for failure to meet its residual-interest requirement, but this falls on the FCM at the close of business the day after its residual-interest obligation. Importantly, today’s release phases in the timing of this capital-charge obligation until one year after its publication in the federal register, as some commenters suggested.

I would like to thank the staff for their work in putting together this balanced approach. With the concerns about residual interest properly addressed, I am happy to support the final rule as an important step forward in the commission’s ongoing efforts to protect customers.

As a final note, I look forward to taking up the Volcker Rule and the position-limits proposal by year-end, along with a number of commission determinations on substituted compliance. As I said at the time we finalized our cross-border guidance, those determinations will benefit from as much transparency as practicable. With that, I look forward to supporting the staff’s recommendations on the rule before the commission today.

CFTC COMMISSIONER O'MALIA'S STATEMENT ON CUSTOMER FUND PROTECTIONS IN DERIVATIVES MARKETS

FROM:  COMMODITY FUTURES TRADING COMMISSION 
Opening Statement, Commissioner Scott D. O’Malia, Open Meeting On Rules Enhancing Protections Afforded Customers and Customer Funds Held by Futures Commission Merchants and Derivatives Clearing Organizations

October 30, 2013

Mr. Chairman,

I would like to thank staff for their hard work on the customer protection rules. I appreciate the hard work of the staff of DSIO, DCR and OGC who have contributed to this rulemaking.

In the wake of the global financial crisis, it is extremely important to intensify regulatory efforts to strengthen customer protection policies in order to promote the financial stability of the derivatives markets. There is no dispute customer protection must be the cornerstone of the Commission’s oversight. Sound customer protection policies and measures will improve the efficiency and transparency of financial markets.

I do support several provisions of the rules that allow customers greater insight into the operations of an FCM. These provisions include: an improved FCM disclosure regime that will give customers new and critical information about their FCM exposures, elimination of the alternative method of calculating segregation requirements for §30.7 funds (treatment of foreign futures or foreign options), improved reporting of segregated fund balances, and enhancements to risk management procedures.

However, my main concern with the draft final rules is their radical reinterpretation of the longstanding residual interest deadline. This reinterpretation decreases the time in which customers’ margin calls must arrive to their FCM from the current three days to just one day.

Such a change would mean a drastic increase in pre-funding of margin, perhaps nearly double the amounts currently required. As a result, many small agribusiness hedgers will have to consider alternative risk management tools or, even worse, will be forced out of the market.

I recognize that the Commodity Exchange Act (CEA) does not permit an FCM to use the money of one customer to margin the futures or option positions of another customer.1 However, I believe that the Commission, in deciding whether to reinterpret this provision, must make such a decision based on data.

Therefore, I am proposing my amendment that would continue to make progress to accelerate the collection of margin of customers from 3 days after the settlement date to 1 day after settlement at 6 pm EST. Just like the draft final rule, the amendment would be phased in one year following the date of publication of the rules in the Federal Register; and just like the draft final rule, the amendment will also require a study to determine the feasibility of changing the collection date and the costs associated with such a move.

The main difference between my amendment and the draft final rule is that my amendment doesn’t mandate that in 5 years’ time, customers will need to meet their margin obligations by the end of the settlement cycle. The amendment simply lets a future Commission make a determination about the best way to proceed after it has collected all the evidence.

In other words, the amendment does not bias the study with an outcome that has been previously determined. Instead, my amendment will task a future Commission to perform the analysis and decide at that point, analyzing against future technology and payment methodologies what the best course of action should be. This way, the future Commission can make an informed and unbiased decision.

If the Commission votes for my amendment, I will be able to support this rule.

Again, I want to express my thanks to the Commission staff for their efforts on this rule.

Let me close by also thanking so many staff from the Division of Enforcement, who devoted their efforts and long hours bringing the recent charges against Rabobank and all of the other LIBOR settlements. Their work must be recognized by the Commission as well as the work from staff from OCE and DMO. We couldn’t do it without their hard work.

Anne M. Termine
Stephen T. Tsai
Maura M. Viehmeyer
Philip P. Tumminio
Timothy Kirby
Jonathan Huth
Brian Mulherin
Rishi Gupta
Aimée Katimer-Zayets
Jason Wright
Elizabeth Padgett
Terry Mayo

Mr. Chairman, thank you for you indulgence to all us to recognize all of their hard work.

1 CEA § 4d(a)(2).

STATEMENT OF CFTC CHAIRMAN GARY GENSLER ON LIBOR MANIPULATION SETTLEMENT WITH RABOBANK

FROM:  COMMODITY FUTURES TRADING COMMISSION 
Statement of Chairman Gary Gensler on Settlement Order against Rabobank
October 29, 2013

Washington, DC — Commodity Futures Trading Commission (CFTC) Chairman Gary Gensler today made the following statement on the CFTC’s enforcement action that requires Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A. (Rabobank) pay a $475 million penalty for manipulation and false reporting charges related to LIBOR and Euribor:

“With today’s settlement, the CFTC has shown – now for the fifth time – how banks have pervasively rigged key interest rate benchmarks, such as LIBOR and Euribor.

“Unfortunately, we once again see how the public trust can be violated through bad actors readily manipulating benchmark interest rates.

“Through hundreds of manipulative acts spanning six years, in six offices, and on three continents, more than two dozen Rabobank employees, including a senior manager, manipulated, attempted to manipulate and falsely reported crucial reference rates in global financial markets.  Rabobank employees also aided and abetted other banks to manipulate benchmark interest rates.

“I wish I could say that this won’t happen again, but I can’t.  LIBOR and Euribor are not sufficiently anchored in observable transactions.  Thus, they are basically more akin to fiction than fact. That’s the fundamental challenge so sharply revealed by Rabobank and our prior cases.

“This fifth instance of benchmark manipulative conduct highlights the critical need to find replacements for LIBOR and Euribor – replacements truly anchored in observable transactions.

“Though addressing governance and conflicts of interest regarding benchmarks is critical, that will not solve the lack of transactions in the market underlying these benchmarks.

“That is why the work of the Financial Stability Board to find alternatives and consider potential transitions to these alternatives is so important. The CFTC looks forward to continuing to work with the international community on much needed reforms.”

"OCC AND FDIC PROPOSE RULE TO STRENGTHEN LIQUIDITY RISK MANAGEMENT"

FROM:  FEDERAL DEPOSIT INSURANCE CORPORATION 
OCC and FDIC Propose Rule to Strengthen Liquidity Risk Management

The Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) proposed a rule on Wednesday to strengthen the liquidity risk management of large banks and savings associations.

The OCC and FDIC’s proposed liquidity rule is substantively the same as the proposal approved by the Board of Governors of the Federal Reserve System on October 24, 2013. That proposal, which was developed collaboratively by the three agencies, is applicable to banking organizations with $250 billion or more in total consolidated assets; banking organizations with $10 billion or more in on-balance sheet foreign exposure; systemically important, non-bank financial institutions that do not have substantial insurance subsidiaries or substantial insurance operations; and bank and savings association subsidiaries thereof that have total consolidated assets of $10 billion or more (covered institutions). The proposed rule does not apply to community banks.

Liquidity generally is a measure of how much cash or cash-equivalents and highly marketable assets a company has on hand to meet its obligations. Under the proposed rule, covered institutions would be required to maintain a standard level of high-quality liquid assets such as central bank reserves, government and Government Sponsored Enterprise securities, and corporate debt securities that can be converted easily and quickly into cash. Under the proposal, a covered institution would be required to hold such high-quality liquid assets on each business day in an amount equal to or greater than its projected cash outflows less its projected cash inflows over a 30-day period. The ratio of the firm's high-quality liquid assets to its projected net cash outflow is specified as a "liquidity coverage ratio," or LCR, by the proposal.

"We learned during the financial crisis just how important liquidity is to the stability of the system as a whole, as well as for individual banks," said Comptroller of the Currency Thomas J. Curry. "A number of large institutions, including some with sufficient levels of capital, encountered difficulties because they did not have adequate liquidity, and the resulting stress on the international banking system resulted in extraordinary government actions both globally and at home. The proposed liquidity rule will help ensure that a bank’s cash, and not tax-payer money, is the first line of defense if it faces a short-term funding stress."

"The recent financial crisis demonstrated that liquidity risk can have significant consequences to large banking organizations with effects that spill over into the financial system as a whole and the broader economy. The proposed rule acted on today would establish first quantitative liquidity requirement applied by federal banking agencies and is an important step in helping to bolster the resilience of large internationally active banking organizations during periods of financial stress," said FDIC Chairman Martin J. Gruenberg.

The liquidity proposal is based on a standard agreed to by the Basel Committee on Banking Supervision. The proposed rule is generally consistent with the Basel Committee's LCR standard, but is more stringent in some respects such as the range of assets that will qualify as high-quality liquid assets and the assumed rate of outflows of certain types of funding. In addition, the proposed rule’s transition period is shorter than that included in the Basel framework. The accelerated transition period reflects a desire to maintain the improved liquidity positions that U.S. institutions have established since the financial crisis. Under the proposal, U.S. firms would begin the LCR transition period on January 1, 2015, and would be required to be fully compliant by January 1, 2017.

RABOBANK TO PAY $475 MILLION SETTLEMENT IN LIBOR MANIPULATION CASE

FROM:  COMMODITY FUTURES TRADING COMMISSION 
Rabobank to Pay $475 Million Penalty to Settle Manipulation and False Reporting Charges Related to LIBOR and Euribor

CFTC Order Finds that for Nearly Six Years, Rabobank Engaged in Acts of Manipulation, Attempted Manipulation and False Reporting of U.S. Dollar, Yen and Sterling LIBOR and Euribor

Washington, DC - The U.S. Commodity Futures Trading Commission (CFTC) today issued an Order against Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A. (Rabobank or the Bank), bringing and settling charges of false reporting and attempted manipulation of the London Interbank Offered Rate (LIBOR) for U.S. Dollar, Yen and Sterling, and of the Euro Interbank Offered Rate (Euribor) and charges of successful manipulation of Yen LIBOR. The CFTC also settled charges that Rabobank, at times, aided and abetted the attempts of derivatives traders at other banks to manipulate Yen LIBOR and Euribor. These violations, which spanned nearly six years, involved more than two dozen employees working out of six offices on three continents. Rabobank is obligated to pay a penalty of $475 million, and the company is ordered to take further steps to ensure the integrity of its LIBOR and other benchmark interest rate submissions in the future.

David Meister, the Director of Enforcement stated, "The CFTC has now charged five global financial institutions for LIBOR manipulative schemes, with nearly $1.8 billion in penalties imposed by the Commission alone. The sheer number of institutions and individuals involved in these cases reflects a truly shocking and brazen degree of unlawfulness, warranting the historic enforcement response we bring forth today and in our prior cases. I want to personally commend Gretchen Lowe and the Division staff who have all painstakingly worked to investigate and prosecute these cases in the finest traditions of law enforcement."

Ms. Lowe, Acting Director of Enforcement-designate, commented, “For years, Rabobank allowed profit-driven traders located in offices around the globe to corrupt the submission process for critical benchmark interest rates. When an institution threatens the integrity of the financial markets, we bring the full force of our authority to bear. Accordingly, today the Commission holds Rabobank accountable for its egregious, manipulative misconduct.”

Highlights of the CFTC Order

Rabobank was one of the global banks that submitted borrowing rate information on a daily basis for use in the calculation of LIBOR for various currencies and for Euribor. Rabobank also traded and held cash and derivatives positions whose value depended on these same benchmarks.

From at least mid-2005 through early 2011, Rabobank traders engaged in hundreds of manipulative acts undermining the integrity of U.S. Dollar and Yen LIBOR, Euribor and, to a lesser extent, Sterling LIBOR. The violations took various forms:

• Rabobank traders, some of whom doubled as LIBOR and Euribor submitters, regularly made and accommodated their fellow traders’ requests to make favorable rate submissions to benefit their trading positions through attempts to manipulate U.S. Dollar and Yen LIBOR and Euribor. On occasion, they did the same with respect to Sterling LIBOR. Making submissions that were, as some Rabobank employees said at the time, “ridiclous,” “obseenly high” and “silly low,” more than two dozen traders, including several desk managers and at least one senior manager located in Rabobank’s New York, London, Utrecht, Tokyo, Hong Kong, and Singapore offices engaged in this wrongful conduct or knew it was ongoing at the time but did nothing to stop it.

• At times, Rabobank was successful in its attempts to manipulate Yen LIBOR. In fact, the misconduct with respect to Yen LIBOR was so entrenched that as traders assumed the role of submitter, their predecessors would train them on the unlawful practices.

• Rabobank also, at times, aided and abetted other banks’ attempts to manipulate Yen LIBOR and Euribor, including coordinating with an interdealer broker on Yen LIBOR submissions to aid the manipulations of the Senior Yen Trader at UBS AG. As one senior Rabobank employee put it: “You know, scratch my back, yeah, and all,” to which the broker observed, “Yeah oh definitely, yeah, play the rules.”

The CFTC Order further finds that Rabobank ignored the obvious conflict of interest it created by assigning traders with trading positions tied to LIBOR and Euribor to serve as Rabobank’s LIBOR and Euribor submitters. Submitters were improperly left to choose between their responsibility to make an honest assessment of borrowing costs and their desire to maximize the profitability of their trading positions. Here, Rabobank’s submitters often resolved the conflict in favor of profit. This conflict was exacerbated by traders and submitters sitting together so that traders could simply shout requests for unlawful submissions across the trading desk. Rabobank thus provided these employees with unfettered opportunities to attempt to manipulate LIBOR and Euribor for profit, and the traders took advantage of those opportunities. The Order also finds that Rabobank otherwise lacked sufficient controls around the LIBOR and Euribor submission process and failed to adequately supervise its traders and submitters.

According to the Order, this manipulative conduct occurred even after the Commission had commenced its investigation of Rabobank’s U.S. Dollar LIBOR practices in April 2010, when Rabobank received the Commission’s request that the Bank internally investigate its U.S. Dollar LIBOR practices. In late 2010, after Rabobank submitters refused, as instructed by a manager, to consider a trader’s requests for particular Yen LIBOR submissions, the Rabobank trader promptly obtained the assistance of an interdealer broker to continue attempting to manipulate Yen LIBOR to benefit his trading positions through early 2011.

The Order requires Rabobank to pay a civil monetary penalty of $475 million, cease and desist from its violations of Commodity Exchange Act, and adhere to specific undertakings to ensure the integrity of its LIBOR and other benchmark interest rate submissions in the future. The Order also recognizes the significant cooperation of Rabobank with the Division of Enforcement in its investigation.

In related actions, the U.S. Department of Justice entered into a deferred prosecution agreement with Rabobank, deferring criminal wire fraud charges in exchange for Rabobank continuing to cooperate and agreeing to a penalty of $325 million; the United Kingdom Financial Conduct Authority (FCA) issued a Final Notice regarding its enforcement action against Rabobank and imposed a penalty of £105 million (approximately $170 million); the Japanese Financial Services Agency (JFSA) issued an administrative action against Rabobank for failure of its internal controls within its Tokyo office; De Nederlandsche Bank (or the Dutch National Bank (DNB)) took action by imposing remedial measures on Rabobank; and the Dutch Public Prosecutor’s Office (DPP)) agreed to a payment of €70 million (approximately $96.5 million) by Rabobank in order for Rabobank to avoid a criminal prosecution.

The CFTC acknowledges the valuable assistance of the U.S. Department of Justice, the Washington Field Office of the Federal Bureau of Investigation, the FCA, the JFSA, the DNB, and the DPP.

*******

With this Order, the CFTC has now imposed penalties of $1.765 billion on entities for manipulative conduct with respect to LIBOR and other benchmark interest rates. See In re ICAP Europe Limited, CFTC Docket No. 13-38 (September 25, 2013) ($65 Million penalty) (CFTC Press Release 6708-13); In re The Royal Bank of Scotland plc and RBS Securities Japan Limited, CFTC Docket No. 13-14 (February 6, 2013) ($325 Million penalty) (CFTC Press Release 6510-13); In re UBS AG and UBS Securities Japan Co., Ltd., CFTC Docket No. 13-09 (December 19, 2012) ($700 Million penalty) (CFTC Press Release 6472-12); and In re Barclays PLC, Barclays Bank PLC, and Barclays Capital Inc., CFTC Docket No. 12-25 (June 27, 2012) ($200 million penalty) (CFTC Press Release 6289-12). In these actions, the CFTC orders each institution to undertake specific steps to ensure the integrity and reliability of its benchmark interest rate submissions.

CFTC Division of Enforcement staff members responsible for this case are Rishi K. Gupta, Anne M. Termine, Jonathan K. Huth, Philip P. Tumminio, Maura M. Viehmeyer, Elizabeth Padgett, Jordan Grimm, Terry Mayo, James A. Garcia, Kassra Goudarzi, Boaz Green, Timothy M. Kirby, Aimée Latimer-Zayets, Michael Solinsky, Jason T. Wright, Gretchen L. Lowe, and Vincent A. McGonagle.