RiskFinancial CrimeUS Watchdog ‘Investigating Swap Contracts’

US Watchdog ‘Investigating Swap Contracts’

US financial regulator the Commodity Futures Trading Commission (CFTC) has launched a broad inquiry into the legitimacy of more than one million energy and metals transactions by major traders in commodities markets over the past two years, according to a
Financial Times
report.

The paper says that the CFTC has issued a ‘special call’ requesting Wall Street banks and traders to provide documents that would confirm the legality of recent derivatives transactions known as ‘exchanges of futures for swaps’ were legal.  JPMorgan Chase, Goldman Sachs and Citigroup are among those to have received document requests.

Lawyers at the CFTC enforcement division are also said to be reviewing the trades for possible violations. The move comes as the watchdog prepares to introduce tougher trading rules for over-the-counter (OTC) derivatives.

The
FT
report adds that the inquiry will focus on whether large traders and market-makers used unregulated OTC swaps markets to trade what were in fact futures, strictly regulated contracts that are economically identical to swaps. Trading futures off an exchange is illegal, and regulators are concerned that traders may have used these deals, known as Exchange of Futures for Swaps (EFSs), to agree prices that did not reflect the market.

CFTC staff are requesting information on EFSs executed following the passage of the Dodd-Frank financial reform law in 2010 until this year, according to individuals familiar with the inquiry. They want traders to show the first step of the transactions involved swaps and not futures contracts masked as swaps. A CFTC official said: “Where’s the evidence? .?.?. It can’t just be that a transaction is labelled a swap and there’s no audit trail.”

The CFTC is also cracking down on off-exchange foreign exchange (forex) ‘Ponzi’ schemes, with several criminal prosecutions and monetary penalties imposed on the perpetrators.

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