NY bank watchdog sinks teeth into Isdafix rigging

Gina Chon

New York's banking regulator is probing an emerging benchmark trading scandal relating to the suspected manipulation of US interest rate swaps, according to people familiar with the matter.

The Department of Financial Services investigation into the so-called Isdafix benchmark is in its early stages and has not yet honed in on particular banks, the people said.

The revelation follows the disclosure by the Financial Times on Friday that German regulator BaFin had highlighted Deutsche Bank's involvement in Isdafix in a scathing report on the lender triggered by the Libor benchmark rigging affair.

Hannelore Foerster | Bloomberg | Getty Images

BaFin found that a New York-based trader had tried to rig Isdafix in 2010 to help the bank's position at the expense of fund management client Pimco. The regulator only became aware of the issue after Pimco complained, according to BaFin.

It took another four years for Deutsche Bank to cut the bonus of the trader, according to the report. Outgoing co-chief executive Anshu Jain headed the relevant division at the time, BaFin said. Mr Jain resigned unexpectedly early this month, only weeks after the previously undisclosed BaFin report was delivered to the bank.

Deutsche is only the second bank to be drawn publicly into the Isdafix affair. Last month Barclays was fined $115 million by the Commodity Futures Trading Commission to settle allegations it tried to manipulate the benchmark over a five-year period ending in 2012. The British bank became the first financial institution to be penalised by the CFTC in its long-running probe of Isdafix.

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The CFTC issued subpoenas to ICAP, the interdealer broker, and 16 global banks in 2013.

The DFS, led until recently by Benjamin Lawsky, tends to be more aggressive than other regulators. In the recent settlement with Deutsche Bank over the Libor scandal, Mr Lawsky ordered the bank to sack seven employees and increased the total penalty by a third to a record $2.5bn.

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Many of the world's largest banks are involved in the Isdafix benchmark and the DFS probe involves those that fall under its jurisdiction, people familiar with the case said.

Those banks include BNP Paribas and Credit Suisse, as well as Barclays and Deutsche Bank. But people familiar with the case stressed that it was too early to say whether the DFS would find any wrongdoing. The agency has jurisdiction over banks that have a New York licence, which includes many European banks.

Barclays, Deutsche Bank, Credit Suisse and BNP declined to comment. Deutsche Bank issued a statement on Friday, but did not address the Isdafix allegations.

Multiple banks have also faced civil lawsuits accusing them of manipulating Isdafix.

Isdafix is used by traders to set the prices for interest rate swaps and has grown to be the leading industry benchmark.

The benchmark was established in 1998 by the International Swaps and Derivatives Association, and was set based on submissions from 16 banks. Beginning in 2002, ICAP, the UK interdealer broker, collected the US dollar quotes and the rate was calculated by Thomson Reuters.