Goldman Sachs Group Inc. has agreed to pay $15 million to settle allegations made by the Commodity Futures Trading Commission (CFTC) that it did not reveal important pricing information for derivatives purchased by its clients to bet on or against an index of foreign stocks.
The CFTC’s investigation found that Goldman Sachs priced swaps in a way that put its clients at a disadvantage between 2015 and 2016. These swaps were linked to an index of stocks from different countries including Japan, Europe, Hong Kong, Singapore, New Zealand, and Australia.
As per the CFTC, clients who traded with Goldman on those terms either acquired the index at a higher-than-market level or sold it at a lower-than-market level, which caused them to face a disadvantage from the beginning of the trade. Goldman Sachs admitted to not disclosing crucial pricing details, as revealed in the settlement order, in order to settle the case.
According to a settlement order with a unit of Goldman Sachs that the CFTC oversees, the clients who traded with the bank were put “underwater” at the start of the trade.
The CFTC stated that it will aggressively pursue swap dealers who violate business conduct standards, as today’s penalty against Goldman Sachs demonstrates. A spokeswoman for Goldman Sachs declined to comment on the settlement.
Swaps are financial contracts that involve the exchange of payments based on changes in the price of a stock, index, or other asset. Banks such as Goldman Sachs offer swaps to traders who can purchase them by paying a fee expressed as an interest rate when they enter into the trade.
In the specific transactions under investigation by the CFTC, Goldman Sachs traders set the initial price of the swap based on the value of the MSCI Europe Australasia and Far East Index on the same day the parties agreed to the trade.
Goldman Sachs Penalized by CFTC
The settlement with Goldman Sachs comes amid increased scrutiny of the swaps market by regulators. The CFTC has been examining banks’ use of swaps, particularly those tied to foreign exchange rates, for potential manipulation.
The settlement with Goldman Sachs is just the latest legal headache for the bank. Earlier this year, the bank agreed to pay $2.9 billion to settle charges related to the 1MDB scandal, in which the bank was accused of helping to launder billions of dollars stolen from the Malaysian sovereign wealth fund.
The settlement included a guilty plea by a Goldman Sachs subsidiary. The bank has also faced criticism over its role in the 2008 financial crisis and other controversies. Goldman Sachs has agreed to pay $15 million to settle regulatory claims that it failed to disclose important pricing details related to the cost of derivatives that its clients purchased to bet on or against an index of overseas stocks.
The Commodity Futures Trading Commission (CFTC) accused Goldman of pricing swaps in a way that put clients in a disadvantageous position by not telling them that it priced swaps on the same day that the parties agreed to the trade, rather than using the following day’s index value. This practice put clients “underwater” at the start of the trade, the CFTC said.
Goldman benefited from same-day swaps because it allowed the bank to enter into related trades that quickly netted a profit, and its traders did not disclose the midpoint price that influenced the buyer’s cost. Instead, they sometimes told clients they were getting a better deal than they actually were, according to the CFTC.
The bank’s traders tended to target clients who knew less about how the underlying markets of the swaps worked, believing that the less clients understood about the economics of the same-day swaps, the more profit the bank could make.
The CFTC settlement order stated that the “preferential” interest rates that Goldman offered clients to entice them to transact same-day did not fully compensate clients for the disadvantage at which they would start the trade.
