United States: CFTC Issues $560,000 Penalty For Inaccurate Large Trader Reporting Of Swaps

On July 6, 2016, the Commodity Futures Trading Commission ("CFTC" or the "Commission") fined Barclays Bank PLC ("Barclays") $560,000 for inaccurate large trader reporting of swaps positions.  This is the third and largest civil monetary penalty to date for violations of the CFTC's Part 20 swaps large trader reporting rules and demonstrates the continuation of a trend toward more aggressive enforcement of swap reporting violations.¹

Large Trader Reporting of Swaps

Pursuant to Section 4s(f) of the Commodity Exchange Act ("CEA") and Part 20 of the CFTC's regulations, swap dealers are required to submit daily large trader reports ("LTR") for reportable positions in certain physical commodity swaps.  These reports must include specific data elements, including the commodity underlying each reportable swap position and its reference price.  CFTC Regulation 20.7 prescribes the form and manner for reporting and submitting the LTRs to the Commission.  The CFTC's Division of Market Oversight ("DMO") provided further clarification on the form and manner for submitting LTRs in its Large Trader Reporting for Physical Commodity Swaps Guidebook.²

Reporting entities must also maintain books and records of their swaps transactions pursuant to CFTC Regulation 20.6 for inspection by the Commission, including transactions in paired swaps and swaptions.  The Barclays matter is the first swaps reporting case involving recordkeeping violations under CFTC Regulation 20.6.

The Barclays Order

Barclays, a London-based swap dealer, allegedly submitted inaccurate LTRs to the Commission from at least March 1, 2013 through October 29, 2014 in violation of CEA Section 4s(f) and CFTC Regulations 20.4, 20.6 and 20.7.  According to the CFTC, prior to and during the mandatory compliance period that began on March 1, 2013,  Barclays submitted LTRs that included incorrect position information and Commodity Reference Price indicators for certain of its transactions.³  The CFTC noted that external vendors supplied some of the incorrect price information to Barclays, which it incorporated into its LTRs.  Notably, the CFTC specifically referenced voluntary reports made prior to the mandatory compliance period even though these reports do not appear to have factored directly into the penalty.  The CFTC's reference to reports made prior to the mandatory compliance period may give market participants cause to wonder the potential risk associated with voluntary early compliance with a new regulatory regime while market participants and the regulator are still in the process "working out the kinks."

As in the JP Morgan matter, Barclays' data processing and reporting systems flagged the errors as potential issues, but Barclays allegedly failed to correct the LTRs prior to submitting them to the Commission.  However, unlike prior LTR reporting cases, Barclays proactively self-reported the errors.  Although Barclays corrected many of the errors, in certain cases, Barclays' LTRs remained inaccurate and incomplete because it had inadvertently failed to retain some of the underlying data required to fully correct the reports.  Nevertheless, the Commission credited Barclays for its cooperation, noting that Barclays "analyzed its past reports and made modifications to its data processing and reporting systems as necessary to comply with its LTR reporting requirements."

Conclusion

The Commission continues to aggressively pursue cases involving incomplete or inaccurate reporting of swap data, including inaccurate LTRs for reportable positions in physical commodity swaps.  In light of these recent developments, compliance professionals review their existing reporting process and should confirm that their firms are maintaining adequate books and records of their swaps transactions as required under the CFTC's recordkeeping regulations.

Footnotes

1 The Barclays Order is available here. The Commission imposed its first civil monetary penalty for inaccurate large trader reporting of swaps against Australia and New Zealand Banking Group Ltd. in September of 2015 for $150,000, available here.  Subsequently in March of 2016, the Commission issued a $225,000 penalty jointly against JP Morgan Ventures Energy Corp. and JP Morgan Chase Bank N.A. for failing to submit large trader reports in the proper form and manner, available here.

2 The June 22, 2015 Guidebook is available here.

3 The CFTC's Division of Market Oversight provided no-action relief from the reporting requirements of Regulation 20.4 to non-clearing member swap dealers until March 1, 2013.

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