Goldman Sachs fined US$15 million for equity index swap violations
11 April 2023 US
Image: AdobeStock/JHVEPhoto
The Commodity Futures Trading Commission (CFTC) has fined Goldman Sachs US$15,000,000 for breaches around trade information and transparency relating to swaps transactions.
The penalty relates to trades conducted in 2015 and 2016 where Goldman Sachs failed to declare pre-trade mid-market marks (PTMMMs) for same-day equity index swap transactions with US-based clients and it failed to communicate information with these clients in a “fair and balanced” manner based on principles of fair dealing and good faith.
The CFTC order, which simultaneously filed and settled charges against Goldman, indicates that the swap dealer “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”.
It indicates that Goldman traded dozens of same-day equity index swap contracts — for which the equity leg of the derivatives contract strikes on T+0, the day of contract agreement, rather than, as typical, on T+1, the day after the contract agreement.
The Commission concludes that: “Goldman failed to disclose to clients the PTMMM of these swaps” — often disclosing a PTMMM for the corresponding T+1 swap — “thereby obscuring the value of the same-day swap”.
In communicating with its clients, GS disclosed a mark for the T+1 swap and then “bid over it” for the same-day swap, thereby implying that the T+0 swap offered a better deal for the client, according to the CFTC, when in practice this was not the case.
“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,” says CFTC.
Commenting on the ruling, CFTC director of enforcement Ian P McGinley says: “The purpose of the CFTC’s business conduct standards is to promote transparency and fairness in the swaps market. The CFTC is committed to ensuring that swap dealers abide by these standards, so that swap counterparties receive disclosures allowing them to assess material aspects of the swaps before entering into them.
“As today’s penalty against Goldman demonstrates, the CFTC will aggressively pursue swap dealers that violate these business conduct standards.”
The penalty relates to trades conducted in 2015 and 2016 where Goldman Sachs failed to declare pre-trade mid-market marks (PTMMMs) for same-day equity index swap transactions with US-based clients and it failed to communicate information with these clients in a “fair and balanced” manner based on principles of fair dealing and good faith.
The CFTC order, which simultaneously filed and settled charges against Goldman, indicates that the swap dealer “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”.
It indicates that Goldman traded dozens of same-day equity index swap contracts — for which the equity leg of the derivatives contract strikes on T+0, the day of contract agreement, rather than, as typical, on T+1, the day after the contract agreement.
The Commission concludes that: “Goldman failed to disclose to clients the PTMMM of these swaps” — often disclosing a PTMMM for the corresponding T+1 swap — “thereby obscuring the value of the same-day swap”.
In communicating with its clients, GS disclosed a mark for the T+1 swap and then “bid over it” for the same-day swap, thereby implying that the T+0 swap offered a better deal for the client, according to the CFTC, when in practice this was not the case.
“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,” says CFTC.
Commenting on the ruling, CFTC director of enforcement Ian P McGinley says: “The purpose of the CFTC’s business conduct standards is to promote transparency and fairness in the swaps market. The CFTC is committed to ensuring that swap dealers abide by these standards, so that swap counterparties receive disclosures allowing them to assess material aspects of the swaps before entering into them.
“As today’s penalty against Goldman demonstrates, the CFTC will aggressively pursue swap dealers that violate these business conduct standards.”
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