Mizuho Capital to pay $6.8m after CFTC violations over FX forward transactions
The CFTC’s settlement with Mizuho is the latest in a series of enforcement actions against swap dealers for violations of the Business Conduct Standards.
The Commodity Futures Trading Commission has announced that Mizuho Capital Markets LLC settled with the regulator after charges of trade practice violations of the Swap Dealer Business Conduct Standards in the Commodity Exchange Act (CEA) and CFTC regulations.
Mizuho Capital Markets LLC of New York operates as a financial institution and offers corporate banking, interest rate, and basis swaps, long-dated forward foreign exchange, cash management, deposits, custody, and risk solutions.
Swap Dealer Business Conduct Standards to ensure honesty in swap markets
The CFTC stated that Mizuho failed to make adequate disclosures to customers in connection with certain foreign exchange forward transactions.
Besides the order to cease and desist from further violations of these standards, Mizuho was ordered to pay $1,847,182.90 in restitution and pay a $5 million civil monetary penalty.
CFTC Director of Enforcement Ian McGinley said: “The CFTC’s settlement with Mizuho is the latest in a series of enforcement actions against swap dealers for violations of the Business Conduct Standards. Congress mandated these standards to ensure that honesty and transparency prevail in swaps markets, including over-the-counter swaps markets. Our significant penalties here reflect the consequences swap dealers face from failing to meet these standards.”
Mizuho trading likely moved spot exchange rate against customers
The Mizuho violations arise from executing certain foreign exchange forward transactions known as “deal-contingent FX forwards from from June 2018 to December 2020.
According to the CFTC, Mizuho failed to adequately disclose to certain customers that it was trading in the minutes or seconds before it provided the spot exchange rate to, and executed the forward transaction with, the customer.
The financial watchdog believes that, at times, such trading by Mizuho likely contributed to moving the spot exchange rate, in the relevant currency pair, against the customer. This means that certain customers obtained the currency they sought to acquire via the FX forward at a relatively unfavorable rate.
This practice also allowed Mizuho to hedge its exposure, vis-à-vis its customers, at a rate more favorable than may otherwise have been available.
CFTC fined Goldman Sachs $15 million for swap dealing violations
Earlier this month, the CFTC fined Goldman Sachs $15 million for violations of the same regulation, the Business Conduct Standards applicable to swap dealers.
According to the order, Goldman failed to disclose dozens of pre-trade-mid-market marks (PTMMM) and failed to communicate to clients in a fair and balanced manner based on principles of fair dealing and good faith.
Goldman Sachs’ violations took place in 2015 and 2016 as the firm transacted dozens of “same-day” equity index swaps with U.S.-based clients.
In a “same-day” equity index swap, the equity leg of the swap strikes on the “same day” as the other material terms of the swap are agreed upon, rather than—as is typical—the day after the date of agreement.
The CFTC order stated that Goldman failed to disclose to clients the PTMMM of these swaps—often disclosing a PTMMM for a different swap (the analogous “T+1” swap) instead, thereby obscuring the value of the same-day swap. The regulator claimed that Goldman opportunistically solicited or agreed to enter into same-day swaps only on days and at times that were financially advantageous to Goldman and disadvantageous to its clients.
Moreover, the manner in which Goldman communicated to clients caused the same-day swaps to appear more economically advantageous to the clients than they actually were. As found in the order, in certain instances, Goldman disclosed a PTMMM for the “T+1” swap and then bid over it for the “same-day” swap, giving the client the impression that the same-day swap was a better deal for the client than the T+1 swap when, in fact, it was not.
Indeed, the order finds any marginal benefit Goldman offered to clients on the interest rate leg of the swap would be outweighed by the cost to clients on the equity leg when transacting “same day.” The order finds that Goldman failed to communicate in a fair and balanced manner by touting the supposed benefits of same-day swap transactions, but not the corresponding costs.