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CFTC Enforcement Actions: Haunted Past or A Hopeful Future?

The aftershocks of financial benchmark crisis that shook the financial world not-so-long-ago are felt even today with the regulators around the world still picking up the remnants of investor confidence and nursing it back to vitality. The recent (May-2016) wave of Commodity Future Trading Commission’s (CFTC) regulatory orders surrounding alleged benchmark manipulation by Citibank and the consequent settlement penalties to the tune of $425 million (LIBOR - $175mn, and ISDAFix - $250mn) is just the tip of the iceberg. The regulators have imposed fines totalling to over $5 billion so far under the CFTC Enforcement program focused on ensuring the integrity of global financial benchmarks.

“The CFTC remains steadfast in its commitment to ensuring the integrity of global benchmarks that are critical to the U.S. and international financial markets” commented Aitan Goelman, CFTC Director of Enforcement as a clear indication of the intent of the regulators. While penalties are one side of the coin, the flip side reveals requirements of extensive remediation in the form of tighter control through compliance and supervisory controls or enhancements such as:

  • Procedures for Integrity and Reliability in Benchmark Rate Submissions 
  • Supervisory Reviews
  • Stricter Controls over Qualifications of Supervisors, Submitters and Reviewers (of benchmark) and Training
  • Internal Controls regarding improper communications and submissions
  • Elaborate Requirements for Reporting, Storage and Documentation and,
  • Enhancements to Monitoring and Auditing, Policies, Procedures and Controls


Not just in the United States, regulators across major financial centres have undertaken such activities to restore the credibility of the existing benchmarks and contain structural risk. There is a clear convergence of regulatory practices involving an overhaul of the determination and submission processes, choice of input data and reporting and post-submission analysis of the benchmarks. The implementation of a waterfall based sequential methodology in major benchmarks such as LIBOR, EURIBOR, TIBOR and the like stands as a testimony to this.

On the other hand, regulators are also actively seeking to find alternatives to these long-standing yet tainted benchmarks. Alternatives - which are robust, market-driven, structurally-stable and capable of replacing existing behemoths. The Sterling Risk-Free Rates activity by the Bank of England, the Study Group on Risk-Free References in Japan, National Working Group of Switzerland, Secured Benchmark Indices Joint task Force in Europe and the Alternative Reference Rates Committee in the United States - are all basically cogs of this very objective.

That begets the question ‘what does this mean to the investor?’ Clearly, it does not require any soothsayers to predict what lies ahead. Banks and Financial Institutions need to brace for the impact of regulatory vigour by aligning their strategic, operational and technological objectives towards the goal of building a resilient financial system. It may be a challenging exercise, but one that is necessary. While the changes come to force and fructify, investors can expect to bask in the hope for robust, reliable and stable markets and financial ecosystem.

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Cornelius Nandyal

Cornelius Nandyal

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Associates in Capital Markets

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