CFTC Orders Wells Fargo to Pay Over $14 Million for Violating Swap Dealer Business Conduct Standards
November 8th | 2019
On November 8, 2019, the U.S. Commodity Futures Trading Commission (the “CFTC”) ordered Wells Fargo Bank N.A. (“Wells Fargo”) to pay ~$14.5M for violating multiple swap dealer business conduct standards.
In 2014, Wells Fargo and one of its counterparties had discussions over the course of several months about Wells Fargo financing the counterparty's acquisition of a Canadian company. The counterparty also inquired about a strategy for hedging its exposure to exchange rate fluctuations prior to closing its acquisition of the Canadian company.
Wells Fargo referred the counterparty to the FX team. Wells Fargo and the counterparty ultimately entered into a four-month forward contract on August 27, 2014, with a settlement price that would be based on the weighted average rate of CAD spot contracts that Wells Fargo agreed to purchase on behalf of the counterparty on August 27, 2014.
The parties also agreed to a pricing component that involved a "cap." The cap would be determined from the spot price of CAD at the time Wells Fargo commenced trading on August 27, plus a risk adjustment of fifty-five "pips." If the weighted average rate was above the price cap, the parties would split "the upside" equally. On the other hand, if the weighted average rate was below the cap, Wells Fargo would assume the downside risk on the transaction.
Wells Fargo failed to communicate in good faith with the counterparty by failing to provide accurate information regarding when the spot CAD was accumulated, including when and at what price the trading commenced, when it finished trading, and information regarding trading engaged in prior to, and contemporaneously with, the forward contract transaction. Further, Wells Fargo failed to have policies and procedures in place to ensure that the accumulation of the spot CAD on behalf of the counterparty was both automatically tracked and accurately calculated. Compounding those failures, Wells Fargo lacked sufficient policies and procedures to ensure that those failures were identified and corrected. Wells Fargo's risk management and supervisory structure lacked independence from its trading function. Only when informed by the counterparty of irregularities did Wells Fargo seek to investigate and remedy its violations. Wells Fargo failed to remedy its supervision failures until May 2018.
Upon discovery, Wells Fargo conducted an internal investigation and provided specific and detailed information to the Division of Enforcement ("Division") regarding the supervision and communications deficiencies its internal investigation revealed, which materially assisted the Division's investigation. Wells Fargo ultimately terminated the employees responsible for the failures associated with the transaction and eventually implemented a substantial plan to remediate these deficiencies and improve the supervision and communications processes for its swap dealer.
The CFTC said Wells Fargo failed to deal with a counterparty in a fair and balanced manner and it failed to implement and monitor systems to ensure compliance with related policies and procedures.
The CFTC ordered Wells Fargo to pay a civil monetary penalty of $10M, restitution of $4.475M, and to cease and desist from violating CFTC's business conduct standards.
To ensure that your firm has the appropriate supervisory controls in place and that your policies and procedures are sufficient, speak with the compliance professionals and #TradeUpToTitan.