Futures Regulator Fines NEX Group Subsidiary $50 Million

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Futures Regulator Fines NEX Group Subsidiary $50 Million

The building that houses the Commodity Futures Trading Commission in Washington, D.C. Photo: Stephen Voss for The Wall Street Journal

Intercapital Capital Markets LLC agreed Tuesday to pay $50 million to settle claims that its brokers helped manipulate a financial benchmark used to calculate a range of interest-rate products.

Intercapital’s settlement with the Commodity Futures Trading Commission ends a long-running investigation of the interdealer broker’s alleged role in attempts to rig the rate, known as the U.S. Dollar International Swaps and Derivatives Association Fix, or ISDAfix. The rate was used to settle options on hedging and speculation contracts known as interest-rate swaps, and as a valuation tool for certain other interest-rate products, the CFTC’s order stated.

Intercapital neither admitted nor denied the allegations but agreed to pay the $50 million penalty. NEX Group NXG 0.29% PLC, the company’s parent, said it is “pleased to have brought this matter to a conclusion.”

The CFTC said that Intercapital’s brokers wouldn’t only assist traders in their manipulative attempts, but on many occasions would suggest ways to manipulate ISDAfix more effectively. A small movement of the benchmark rate could result in meaningful gain for a bank’s trades, the CFTC stated in an order outlining the settlement.

The more than $300 trillion market for interest-rate swaps is dominated by big banks, which charge everyone from hedge funds to manufacturing companies a premium for the trades designed to protect against fluctuations in interest rates. The swaps are settled using the benchmark rate.

“This matter is one in a series of CFTC actions that continues to demonstrate the commission’s unrelenting commitment to protect those who rely on the integrity of critical financial benchmarks,” said James McDonald, the CFTC’s enforcement director.

The ISDAfix U.S. dollar rate is quoted twice a day, at 11 a.m. and 3 p.m., and the CFTC’s case against Intercapital involved the benchmark set at 11 a.m. Intercapital polled a panel of banks about the rate during a specific time period and asked them to submit estimates. Outliers were eliminated and an average was taken from the remaining contributions.

The CFTC said the misconduct occurred from 2007 to 2012. Early in the period, Intercapital brokers and their clients, mostly traders at banks, sometimes explicitly discussed plans to manipulate the benchmark, the CFTC said. “If you want to affect it at eleven, you tell me which way you want to affect it, we’ll, we’ll attempt to affect it that way,” one broker wrote, according to the CFTC’s order.

Write to Dave Michaels at [email protected]