UBS: The Benchmark, the Fix and the Orders Meant to Vanish

UBS’s CFTC benchmark and spoofing record includes a $700 million civil settlement over interest-rate manipulation allegations against UBS AG and UBS Securities Japan Co., Ltd. Later CFTC settlements covered foreign exchange benchmarks and precious-metals orders placed with the intent to cancel. If you worked around those markets, the connection is familiar: a rate submission, a customer’s order or a misleading bid can serve the position on the desk’s own book.

The Commodity Futures Trading Commission’s December 2012 benchmark order covered both the parent bank and its Japanese subsidiary. The settlements resolved different allegations of market manipulation, with its own trading records and corporate response.

The revealing part is the alleged conduct inside the business. The orders describe traders helping determine rates that priced their own positions, sharing confidential customer orders with competing banks, and displaying trading interest they intended to withdraw.

The LIBOR Submission Served the Trading Book

The commission alleged that UBS skewed LIBOR, Euribor and Euroyen TIBOR submissions to benefit derivatives positions. The conflict sat inside the submission process: some employees responsible for supplying the bank’s benchmark rates also traded derivatives whose value depended on those rates.

LIBOR submissions were supposed to reflect the bank’s assessment of its borrowing costs. The published benchmark then helped determine payments and values elsewhere. The order described its use in swaps and loans, and in the settlement of interest-rate futures and options. A submission was an input to other people’s contracts.

According to the commission, UBS submitters accommodated requests from colleagues and considered their own desks’ positions when choosing rates. Managers allegedly made requests themselves, helped their staff’s requests or knew the practice was routine and failed to stop it. The agency described approximately 2,000 written internal and external requests to influence Yen LIBOR in a three-year period, covering 75% of the days UBS made submissions during that period.

The alleged effort reached beyond UBS’s own submission. A senior Yen derivatives trader sought favorable submissions through traders at other banks and used interdealer brokers to spread false market information to panel banks. Brokers allegedly received extra business, including trades arranged to generate commissions. The bank’s submitted number, the broker’s market message and the derivatives position belonged to the same commercial story.

A Borrowing Rate Used to Manage the Bank’s Image

The commission separately alleged that UBS used false submissions during the financial crisis to protect its reputation. Managers directed submitters to keep rates toward the low end of the panel and later near the middle, allegedly influencing submissions to avoid negative perceptions of the bank’s financial condition.

A borrowing-cost benchmark was being asked to do public relations. We see the same conflict in both accounts: the bank’s interests were allowed into a number other people relied on as market information. For an insider, the instruction behind the submission can explain what the published rate conceals.

The Foreign Exchange Fix Put Customer Orders Into Private Chats

UBS AG agreed to a $290 million civil penalty under the November 2014 CFTC FX order. The agency alleged that, from 2009 through 2012, traders attempted to manipulate currency benchmarks to benefit their own positions or those of traders at other banks.

The World Markets/Reuters Closing Spot Rates provided exchange rates used to price currency trades and derivatives. The order focused in part on the 4 p.m. London fix, a benchmark calculated from market activity around the fixing time. Customer orders tied to that rate gave a trading desk advance knowledge of business it would need to execute.

The commission alleged that UBS traders shared confidential customer-order information and trading positions in private electronic chats. Participants discussed coordinated strategies, changed positions to accommodate the group and tried to push benchmarks in the direction that favored them.

The order describes how coordination could change the flow reaching the fix. Traders with orders against the group’s preferred direction could trade with outsiders beforehand. Traders whose orders favored the group could transfer them to a single participant to execute during the fixing period. The alleged purpose was to concentrate buying or selling pressure where it would influence the benchmark.

The customer needed a currency transaction. The chat group allegedly saw an opportunity to shape the price of it.

UBS CFTC FX Corporate Self-Report Earned Cooperation Credit

UBS’s corporate self-report in the Commodity Futures Trading Commission’s foreign exchange investigation earned explicit cooperation credit. The order says UBS was the first bank to report preliminary findings of questionable conduct and had begun its own internal investigation before the agency’s Division of Enforcement began its investigation.

UBS supplied information and analysis that helped the agency investigate. It also began strengthening controls around foreign exchange benchmarks and traders’ internal and external communications. Those changes addressed the order’s allegations that inadequate supervision and chat monitoring had helped the conduct escape detection.

The commission also noted that some of the alleged foreign exchange conduct occurred while UBS knew regulators were investigating interest-rate benchmark manipulation. We see the absurdity: scrutiny of one benchmark had not stopped alleged manipulation of another.

Precious-Metals Spoofing Made Orders Look Bigger Than the Intent to Trade

UBS AG agreed to a $15 million civil penalty in the January 2018 precious-metals settlement. The commission said cooperation substantially reduced the penalty. It alleged manual spoofing in futures by precious-metals traders on the spot desk, including gold and silver contracts on COMEX. The alleged spoofing ran from January 2008 through at least December 2013.

The pattern began with a smaller order the trader wanted filled. A larger order then appeared on the opposite side of the market, allegedly entered with the intent to cancel it. That displayed interest made the order book look heavier with buyers or sellers than the trader’s actual intentions justified.

According to the commission, the purpose was to induce other participants to fill the smaller resting order. The trader then canceled the larger order after the resting order filled, or when the risk of executing the larger order became too great. The benefit came from the trade the apparent market depth helped attract.

The chats put a voice to the alleged strategy. In an exchange quoted in the order, a UBS trader asked a trader at another financial institution:

The other trader answered yes. The UBS trader then offered to spoof for him. The exchange connected an order-entry tactic to the position it was meant to help. That is what the chat adds to the market data.

Customer Stop-Loss Orders Became Targets

The same order contained a separate allegation about trades designed to trigger customers’ stop-loss orders. A stop-loss order becomes a market order when its specified price is reached. Knowing that price tells a trader where additional buying or selling could enter the market.

The commission alleged that a UBS trader coordinated with a trader at another institution to push futures prices toward those levels. Sometimes the customer had placed the stop through UBS; sometimes the UBS trader asked where stops rested at the other institution. The alleged purpose was to buy at artificially low prices or sell at artificially high ones for the trader’s own book. We see the customer-order information doing double duty: the bank held it to execute the customer’s business, and a trader allegedly used it to target that business.

What UBS Supplied After Its Internal Review

The commission said UBS discovered potential misconduct previously unknown to the Division of Enforcement and promptly reported it. UBS kept investigating and pointed the agency to the documents that mattered.

The bank also worked to improve its compliance systems and policies for spoofing in precious-metals and other futures. We see the contrast: years of alleged spoofing, then a discount for helping the regulator investigate it.

The Criminal Admissions and the Broken Agreement

In its December 2012 criminal plea agreement, UBS Securities Japan admitted its role in manipulating LIBOR. The Justice Department’s account of that agreement explains the trading incentive: large Yen derivatives positions could gain substantially from small changes in the benchmark. The parent, UBS AG, separately accepted responsibility for misconduct under an agreement with the department not to prosecute it. The FBI’s Washington Field Office investigated the criminal conduct.

In May 2015, UBS AG pleaded guilty to wire fraud connected with LIBOR manipulation after the Justice Department determined that the parent had breached its earlier agreement. The department’s account of the factual statement attached to the plea agreement describes deceptive foreign exchange practices after that agreement, including undisclosed customer markups.

According to that criminal factual statement, traders and sales staff told customers that markups were not being added when they were. On other occasions, staff used hand signals to conceal markups or executed limit orders at a different level from the customer’s instruction to add undisclosed charges.

The criminal account exposes another part of the trading relationship: what the customer was told, what the desk executed and what it kept. A conversation or instruction inside the desk can connect those facts in a way the customer’s confirmation may leave unexplained.

What Evidence Is Required to Prove Fraud?

For trading manipulation, evidence has to connect the instruction, the market activity and the position that stood to benefit. We work through those connections with you, drawing on the submissions, chats and order histories that make the UBS allegations concrete.

The 2016 Futures and Derivatives Law Report article The Exercise of Anti-Spoofing Authority in U.S. Futures Markets: Policy and Compliance Consequences explains why the entire life of an order matters. Submissions, changes, cancellations and executions have to be understood together. The article also describes the harm to other traders: spoofing can lure them into losing trades or lead them to avoid profitable trades because they suspect the interest they see.

That second cost is easy to miss. False depth can interfere with a trading decision even when the observer refuses to trade into it. An employee who knows the instruction behind an order and a market participant who saw its effect bring different views of that decision. Outside market participants can also be CFTC whistleblowers.

The benchmark pattern also appears in Deutsche Bank‘s record. The commission’s separate ISDAFIX settlement with Deutsche Bank Securities Inc. concerned allegations about trading around a fixing and submissions intended to favor derivatives positions. The common question is whose position benefited from the rate other contracts used.

For the UBS reader, the valuable knowledge may sit in a submission conversation, a fixing strategy, a stop-order instruction or an internal review explaining a trading sequence. Our work starts with understanding what you saw and how the records fit it.

How Much Is a Whistleblower Claim Worth?

Under the Commodity Exchange Act, qualifying whistleblowers can collectively receive 10% to 30% of collected monetary sanctions in an action. A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers. These UBS trading actions concern the separate CFTC whistleblower program. We shape what you know into a case and bring in CFTC whistleblower lawyers who understand the trading involved.

You Know What the Desk Was Trying to Do

If you know why a rate was submitted, a customer order was shared or a bid was placed, speak to one of our Whistleblower Experts about what happened inside the desk. We work with you to build the trading story, find CFTC whistleblower lawyers with the right market experience and stay beside you through the case. We will help you turn that knowledge into your strongest CFTC whistleblower case.