Exclusive: FBI suspects front running of Fannie, Freddie in swaps market

Tue Jan 14, 2014 12:35am EST
 
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By Richard Leong

(Reuters) - Wall Street traders may be manipulating a key derivatives market and front running Fannie Mae and Freddie Mac, hurting the US-owned mortgage giants in the process, according to an FBI intelligence bulletin reviewed by Reuters.

Using what Federal Bureau of Investigation agents described as "unsophisticated tradecraft," such as hand signals and special telephone ring tones, some traders are conspiring to rig rates on large orders submitted by Fannie Mae and Freddie Mac, or front running them in the interest rate swaps market, the document says.

The FBI said in the bulletin that the information came from a former high-level employee at a U.S. bank and an employee at a Canadian Bank, plus interviews with other bank workers conducted in 2012 and 2013. The former high-level employee at the U.S. bank estimated the front running had resulted in profits of $50 million to $100 million for the bank, the FBI said.

The bulletin did not name any of the traders or banks suspected of the activity, or indicate whether it may extend beyond the two banks.

Front running occurs when someone with advance knowledge of another market participant's plan to make a sizable transaction puts an order in first, often profiting from a market move that can occur once the big trade has gone through.

The FBI bulletin is the latest indication that officials are concerned that traders are manipulating financial markets. U.S. and European authorities have fined 10 banks around $6 billion for allegedly manipulating the London Interbank Offered Rate, or LIBOR, and other interest rate benchmarks, and authorities are actively investigating comparable behavior in the foreign exchange market.

PHONES PROGRAMMED

Current and former employees at the U.S. bank said that swap traders at the bank programmed their phones with different ring tones to identify when certain customers were calling, alerting traders that a large order was about to be placed, the FBI said.   Continued...

 
Fannie Mae headquarters is seen in Washington November 7, 2013. REUTERS/Gary Cameron