US derivatives industry watchdog has slapped a fine of $45 million on HSBC Bank USA for allegedly permitting ‘manipulative and deceptive trading’ by its traders and failing to keep records of its business calls. The Commodity Futures and Trading Commission (CFTC) announced the monetary penalty on Friday, noting that it had reached a settlement with the subsidiary firm of the global British bank, HSBC.

Today @CFTCjohnson released a statement about the CFTC’s orders against HSBC for fraudulent and manipulative swaps trading and more. Read it here: https://t.co/GgenohESmS

— CFTC (@CFTC) May 12, 2023

CFTC Slams HSBC for Spoofing

According to CFTC, between March 2012 and 2015, traders at the HSBC subsidiary, which is registered as a provisional swap dealer, repeatedly engaged in deceptive trading and spoofing Read this Term related to swaps Read this Term with bond issuers. The watchdog noted that the firm’s traders used its counterparties’ material confidential information about the timing and pricing of issuer swaps to increase HSBC’s profitability to their detriment.

Furthermore, the regulator alleged that the subsidiary tried to manipulate on-screen prices, on which issuer swaps were partly based, by spoofing interdealer brokerages that controlled the screens. Spoofing refers to a fraudulent practice where traders place orders with the intent to cancel them before their execution.

“HSBC traders intentionally traded at the broker firms controlling the relevant screens during telephonic pricing calls in which the bond issuances, and the related issuer swaps, were priced, and HSBC traders structured their trading intentionally to move prices for the relevant swaps on these screens,” the CFTC explained.

The watchdog pointed out that supervisors and senior management at the swap dealer knew of this conduct and encouraged their traders to engage in the practice.

On the other hand, the derivatives watchdog said from at least March to July 2020, HSBC failed to make and keep recordings of its swap business-related mobile phone calls due to a recording failure.

In a separate statement, the derivatives market supervisor said it had slammed two HSBC provisional swap dealers, HSBC Bank USA and HSBC Bank Plc, as well as HSBC Securities (USA) Inc., a futures commission merchant, with over $30 million in penalties for their record keeping failures and discussing deals via unapproved methods, such as personal text and WhatsApp.

This just in, @CFTCcgr released a statement about HSBC and market manipulation and the widespread use of WhatsApp and other unauthorized communications platforms to evade regulatory oversight. Read it here: https://t.co/rqmqMYFCm3

— CFTC (@CFTC) May 12, 2023

“The order further finds the widespread use of unapproved communication methods violated HSBC’s own policies and procedures, which generally prohibited business-related communication taking place via unapproved methods,” the CFTC explained.

“Further, some of the very same supervisory personnel responsible for ensuring compliance with the firms’ policies and procedures themselves used non-approved methods of communication to engage in business-related communications, in violation of firm policy," it added.

CFTC Heightens Crackdown on 'Off-Channel Communications'

Meanwhile, the CFTC earlier on Thursday announced that it had fined The Bank of Nova Scotia (BNS), another provisionally registered swap dealer, and Scotia Capital USA Inc, a futures commission merchant, the sum of $15 million for failing to keep their records ‘for a period of years’. Moreover, the regulator found 'widespread use of unapproved communication methods,' among the affiliates.

Today the CFTC announced that it ordered the Bank of Nova Scotia to pay a $15M penalty for recordkeeping and supervision failures for widespread use of unapproved communication methods. Learn more: https://t.co/Ecdvrznljp

— CFTC (@CFTC) May 11, 2023

The CFTC’s latest action against HSBC and BNS’ affiliates is a continuation of its crackdown on electronic trading firms in the country for the use of WhatsApp-like devices for official business communication. In September last year, the watchdog slammed a total penalty of $1.1 billion on 16 Wall Street firms for their ‘off-channel communications’.

The firms include subsidiaries of Barclays, BofA, Citigroup and Goldman Sachs, among others.