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Univ. of Toledo College of Law

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Tuesday, June 30, 2009

FINRA Fines Firm and Former Broker for Improper Communications with Interdealer Brokerage Firms

FINRA announced that it has fined ICAP Corporates LLC, of Jersey City, $2.8 million and sanctioned a former broker for numerous improper communications with other interdealer brokerage firms about customers' proposed brokerage rate reductions in the wholesale credit default swap (CDS) market. 

Jennifer Joan James, a former ICAP broker and manager of ICAP's CDS desk, was fined $350,000 and suspended from working in the securities industry in all capacities for six months for attempting to improperly influence other interdealer brokerage firms and their employees. ICAP was fined $1.8 million for its supervisory failures — specifically, failing to detect and prevent improper inter-firm communications — and $1 million for engaging in conduct through its CDS desk manager that was designed to improperly influence other firms and their employees. 

CDS instruments generally enable counterparties to purchase and sell "risk protection" associated with certain credit events (such as bankruptcies, defaults or credit downgrades in underlying instruments). The risk protection purchaser generally pays a periodic fee to the seller, and the seller agrees to pay the purchaser an agreed-upon amount should one of those credit events occur. Interdealer brokerage firms provide an intermediary brokerage service to commercial and investment banks in the wholesale markets to identify and match counterparties for such CDS transactions. The firm receives brokerage fees for successfully introducing buying and selling counterparties (its brokerage customers) but is not a party to the CDS transactions themselves.

 FINRA found that James engaged in repeated improper communications with personnel at other interdealer brokerage firms that improperly attempted to influence those firms and individuals. These communications generally occurred after individual customer firms sought to renegotiate their CDS brokerage fees, sending schedules of proposed rate reductions separately to a number of individual interdealer brokers. James's communications with personnel at other interdealer brokers included reactions to customers' proposed rate reductions, statements concerning actual or contemplated interdealer broker responses or counter-positions to the customers' proposed rate reductions, and discussions about the interdealer brokers creating identical or similar, individual counter proposals to rate reduction requests.

 FINRA also found that while James's communications typically involved one-to-one discussions with personnel from one other CDS interdealer brokerage firm, the communications frequently referred to similar discussions about the proposed fee-reduction schedules with additional interdealer brokerage firms.

ICAP and James settled these matters without admitting or denying the allegations, but consented to the entry of FINRA's findings.

FINRA's investigation into misconduct by the other interdealer brokerage firms and individuals involved is continuing.

http://lawprofessors.typepad.com/securities/2009/06/finra-fines-firm-and-former-broker-for-improper-communications-with-interdealer-brokerage-firms.html

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