Former HSBC exec seeks summary judgment in lawsuit brought by CFTC
Christophe Rivoire, a former senior member of HSBC’s rates trading desk in New York, is pushing for a summary judgment in a lawsuit brought by the Commodity Futures Trading Commission (CFTC).
The relevant documents, seen by FX News Group, were submitted on May 1, 2023 at the New York Southern District Court.
This case arises from a July 2012 interest rate swap transaction between the Japan Bank for International Cooperation (JBIC), a Japanese government instrumentality, and HSBC, one of the largest financial institutions in the world.
In July 2012, JBIC came to market with a $2 billion bond offering that paid a fixed rate of interest at six-month intervals for a period of five years (at which point JBIC would be obligated to repay the principal amount of the bond). In conjunction with the bond issuance, JBIC entered into a $2 billion fixed-for-floating interest rate swap with HSBC. The economic terms of the JBIC Issuer Swap were determined on an audio conference call held between JBIC and HSBC on July 11, 2012.
In this civil enforcement action, the CFTC alleges that Christophe Rivoire, a senior member of HSBC’s rates trading desk in New York, engaged in market manipulation and fraud in relation to the JBIC Issuer Swap. In brief, the CFTC alleges that Rivoire instructed a junior HSBC trader to manipulate the market for a particular investment product during the Pricing Call, and that Rivoire defrauded JBIC by not disclosing the alleged market manipulation.
The core e of the CFTC’s case is a single line in a single email from Rivoire to Morgan Najar, the junior trader, a week before the Pricing Call: “So we’ll need to push the screen as much as we can before the pricing.” According to the CFTC, this email was an instruction from Rivoire to Najar to manipulate the market for a specific financial product, 5-year 6-month- 3-month basis swaps (“6s3s basis swaps”), at the time of the Pricing Call.
Rivoire argues that the CFTC allegations are contradicted and disproved by a series of actual facts that have been established in discovery:
- When HSBC entered into the Issuer Swap with JBIC, the bank assumed $2 billion in basis risk. To fully hedge that risk position, HSBC was required to sell a total of $2 billion in 6s3s basis swaps in the broker market.
- On the day of the Pricing Call, Najar sold a total of $1.65 billion in 6s3s basis swaps in open-market hedging transactions. All of these transactions had the indisputably legitimate economic effect of hedging a portion of the $2 billion in basis risk that HSBC assumed when it entered into the Issuer Swap.
- Najar sold the $1.65 billion in 6s3s basis swaps over a multi-hour time period. Before the Pricing Call began, he had already sold $1.15 billion, and he sold a further $500 million during the Pricing Call. At the end of the Pricing Call, HSBC still had approximately $350 million in unhedged basis exposure.
- The prices of Najar’s hedging trades were determined, in all cases, by the normal forces of supply and demand.
- Liquidity conditions were excellent, and Najar’s trading caused minimal price impact. Even though he sold a total of $1.65 billion in 6s3s basis swaps on the morning of July 11, the prevailing market price actually rose during the time that he was selling.
- JBIC was a highly sophisticated counterparty. The JBIC Issuer Swap was executed pursuant to a written contract, known as an “ISDA Master Agreement,” under which JBIC and HSBC transacted on a principal basis and HSBC was not a fiduciary to JBIC.
Rivoire stresses that the CFTC’s summary judgment submission fails to address what happened at ICAP. During the Pricing Call, representatives of HSBC and JBIC were looking at basis swap prices displayed on two broker screens that were maintained by ICAP, a leading interdealer broker. JBIC had insisted that these screens – known as “19905” and “USDBASIS” – would be used as the reference sources for certain inputs into a complex series of calculations that determined the price of the JBIC Issuer Swap. However, there were a series of technical breakdowns within ICAP on July 11, 2012 that resulted in inaccurate prices being displayed on the USDBASIS screen for part of the Pricing Call.
The problems at ICAP caused confusion on the Pricing Call, as both HSBC and JBIC attempted to understand the gyrations they were witnessing on the USDBASIS screen. Frustrated by the inaccurate numbers on the screen, Najar berated Mike McDonnell, a broker at ICAP, during a side conversation that occurred in parallel to the Pricing Call. Ultimately, ICAP was able to correct the problem, and HSBC and JBIC agreed to go forward with the transaction.
In its summary judgment motion, the CFTC alleges that Najar’s communications with McDonnell – both before and during the Pricing Call – were part of his efforts to implement Rivoire’s purported instruction to engage in market manipulation.
But, Rivoire says, the CFTC runs into a series of facts:
- In 2012, ICAP brokers updated the USDBASIS screen manually, based on new transactions and price quotations. Because of the need for manual updates, as well as a design weakness that came to light in discovery, the screen sometimes showed inaccurate prices.
- During the Pricing Call, the USDBASIS screen malfunctioned badly because of yet another problem: a botched transfer of control of the screen from ICAP London to ICAP New York.
- Before and during the Pricing Call, Najar asked McDonnell to fix the problems with the USDBASIS screen, so that the screen would display current and accurate prices.
In short, Rivore claims that ICAP mismanaged its broker screens, causing the screens to display inaccurate market prices. “This was entirely the fault of ICAP,” he says.
- Morgan Najar is the central actor in the CFTC’s narrative. And yet, the CFTC also fails to acknowledge critical facts about him that came to light during discovery:
- Prior to the JBIC Issuer Swap, Najar had only participated in one other issuer swap, and it had not gone well: he failed to execute enough hedging transactions, and he was saddled with a large, money-losing position for many months afterward.
- At the time of the JBIC Issuer Swap, Najar did not think he was being asked to participate in market manipulation, fraud, or other improper conduct.
- In 2012, Najar was disgruntled and unhappy in his job. He was prone to snarkiness and made disparaging statements about Rivoire’s French nationality. He received a poor performance evaluation for 2012 and left HSBC in early 2013.
In 2017, Najar began cooperating with the CFTC in this investigation. He ultimately signed a declaration in which he stated that he interpreted Rivoire’s “push the screen” email as an instruction to “sell 5-year basis swaps at ICAP to lower the price of those swaps on the ICAP screens at the moment of pricing.” In his declaration, Najar stated that he “did a number of things leading up to and during the pricing” that he “would not normally have done,” such as trying to avoid selling 5-year basis swaps in the days leading up to the pricing call and trading through ICAP as opposed to a different interdealer broker firm.
There are substantial reasons to doubt the veracity of Najar’s declaration, Rivoire says, including Najar’s bias against Rivoire and his desire to curry favor with the CFTC. However, even if Najar’s declaration is accepted as truthful for purposes of this motion, the CFTC’s case cannot stand, Rivoire explaims. The standard for liability is not a junior trader’s subjective interpretation of an email, nor is it whether he deviated from his purported “normal” practices (in a type of transaction with which he had virtually no prior experience). The test is whether the evidence fulfills the legal elements of market manipulation and fraud under the Commodity Exchange Act.
Rivoire concludes his motion by stating that he is entitled to summary judgment.