The bank said in a quarterly securities filing that the Commodity Futures Trading Commission is investigating “the trading and clearing of interest-rate swaps by investment banks”.
“Citigroup is cooperating with the investigation,” the bank added in the filing. A bank spokesman declined to comment further.
Interest-rate swaps are derivative contracts that allow two parties to exchange the cash flows associated with a debt instrument. This can change coupon payments from a fixed to a floating rate, or vice versa. They are used extensively by companies to manage their exposure to changes in interest rates and banks often take the other side of these trades.
Citi has more than $ 33 trillion in interest-rate swaps measured by their notional, or face, value. This doesn’t represent the actual cash flows connected to the contracts, but the total amount underlying them.
Such swaps contracts don’t have fixed market prices, but can be derived from other prices in the market. As a result, they generally are classified as “Level 2” assets and liabilities on a bank’s books. This signals that there is some estimation involved in the values assigned to the swaps, but that those values are derived from observable market data.
Citi had about $ 516 billion in such Level 2 interest-rate derivative assets as of September 30, according to its latest filing. It had about $ 493 billion in such liabilities.
It isn’t known exactly what areas related to such swaps that the CFTC is focusing on. The agency for years has engaged in a global crackdown against banks for allegedly fixing interest rates, including fines against Citi in May.
Citi’s latest disclosure could signal the agency is looking into another aspect of how banks deal with swaps. Throughout the year, multiple pension funds have sued more than a dozen banks, including Citi, alleging they conspired to prevent other companies from developing exchange-like trading for interest-rate swaps. Some of the companies that wanted to develop new trading tools have also filed lawsuits.
They allege that the banks want to keep the swaps market opaque, to benefit banks over clients. Companies and other clients use interest-rate swaps to hedge themselves against the risk of fluctuating interest rates.
Separately, the CFTC has fined some banks in recent months, including Deutsche Bank, JP Morgan and Barclays, over failures to reports swaps trades in a timely and accurate way. The Dodd-Frank Act required banks to report swaps trades in a timely manner in hope of giving regulators a better view of the opaque market and preventing banks from having a private view of prices.
Write to Christina Rexrode at firstname.lastname@example.org
This article was published by The Wall Street Journal