Finanstilsynet, the Norwegian Financial Supervisory Authority, has penalized Danske Bank A/S NKr 50m ($4.4m) for alleged market manipulation relating to the issuance of a government bond in 2023.
In February 2023 Danske Bank participated in the syndication of a 10-year government bond of NKr 22 billion ($1.9 billion) for Norges Bank (the central bank of Norway), which issued the bond on behalf of the Norwegian government.
During the issuance, the Norwegian swap rate was used as the reference rate for the government bond’s effective yield and price. Finanstilsynet believes this rate had been driven higher by Danske Bank in a “deliberate strategy” to generate more profit for the bank.
According to the regulator, the swap rate was driven to an “abnormal or artificial level at the time of pricing,” and specific trading was deliberately undertaken at a time when the bank would have profited from a high effective yield.
“Abnormal and artificial course” in Norwegian law
Høyesterett, the Supreme Court, provided the following guidance around the assessment of what constitutes an “abnormal and artificial course”:
“It can be difficult to determine what an artificial exchange rate is in a market that depends on so many different factors as does the stock market. It must be assumed that a course, which itself is the result of general supply and demand is to be considered a normal course. A course may first become abnormal or artificial where it is also the result of other factors being present.”
“There was a significant price increase in the relevant interest rate swaps prior to the time of pricing,” Finanstilsynet stated.
Messages and exchanges captured “illuminating”
During the investigation, the authority reviewed a significant volume of information, including audio recordings of telephone conversations, Teams conversations, e-mails, as well as Bloomberg terminal chats, calling them “illuminating.”
The regulator’s findings suggest that one trader in particular “pushed” the sales department in order to increase the interest rate swap needs of the bank.
Finanstilsynet also investigated communications on Squawk Box, a two-way communication system used by the bank, which demonstrated “frenetic behavior” by the trader during the syndication, with significantly higher levels of activity as the moment of pricing approached.
“Stop doing it mate. It’s on the fucking chat.”
The broker to the trader
Offering fascinating insight into the events that led to the regulatory action, the captured messages showed the trader “shouting” at a broker to refresh the screen (“move your screen!”) 16-17 times during a five-minute period, as well as repeating phrases like “total now” and “where is the offer now?”
The broker, in turn, sent the trader a message to “stop shouting,” also showing an awareness of the exchanges being potentially problematic and possibly incriminating: “Stop doing it mate. It’s on the fucking chat.”
The transaction data demonstrated that Danske Bank stopped its trading activity at the precise time when pricing was completed. In the Squawk Box recordings, one person close to the trader is heard saying: “then we’re done.” The trader’s response is eminently quotable: “Aggh fuck it – take me off – OFF OFF OFF!” […] “I am off”.
The investigators also uncovered that earlier in the morning before the trading began, the trader openly spoke to the risk team about the price advancing from NKr 8.5 billion to 9 billion: “Yeah, so I am about 470… that is about, let’s assume, so now it is growing right, now it is growing cause I get more and more orders in, so it is about 6.2 already… eh….6 billion we have… eh… so let’s assume it is about 5 to 8,5 to 9 billion in this.”
And after the event, the trader was captured as saying: “I mean to be honest – keep this to yourself like – it was a fucking home run mate! We made a killing today – I made, I’ve printed this 12 year at 3 and I got it up at 16.” (Referencing the interest rate swap at 3.16 percent)
In particularly damning evidence the trader was captured calling out that Norges Bank “got fucked” and that they “Fucking hated this shit,” exclamations that the regulator believes referred to the high price the central bank had to pay for the government bond.
Danske given credit for self-reporting
In a potentially positive sign for the bank, its compliance team and an improving compliance culture, it identified and self-reported the issue by notifying the Danish supervisory authorities of the potential manipulation. The Danish regulator then referred the case to its Norwegian counterpart who deemed the self-reporting a “mitigating factor” when levying the penalty.
Alex Viall, CSO at Global Relay, was broadly positive about the bank’s actions and suggested that “credit [must go] to Danske Bank for self-reporting and discovering this instance – the multiple data sources that exhibited the signs leading to this abuse underline the value of sophisticated systems that can capture and monitor voice and chat communications.”
But Finanstilsynet stressed that it deemed the violation as serious matter, one that potentially contributed to the “undermining [of] confidence in the market.”
And Danske Bank was found to have violated the rules prohibiting market manipulation in MAR Article 15 as well as in Article 12 along with the Securities Trading Act Section 3-1 (Verdipapirhandelloven).
The regulator also held that the bank had violated Sections 21-1, 21-9 and 46 of the Administration Act (Forvaltningsloven).
Bank strengthens guidelines
Danske Bank claims to have implemented multiple measures to improve its internal processes connected to bond issuance in response to the incident. It says that it has strengthened internal guidelines and training and is conducting a “comprehensive study” of the lessons learned from the incident.
The bank’s internal audit function is also currently involved in a forensic review of the incident with the intention of sharing any additional findings with Norges Bank.
Carolina Crevatin Martin, Head of Markets at Danske Bank, responded on behalf of the bank: “We strongly distance ourselves from the behavior described by the Norwegian Financial Supervisory Authority and apologize to the parties involved that this happened. The integrity of the market and the trust of our customers are cornerstones of our business.
“When problems arise that could put our integrity at risk, we will always take it very seriously. When it became clear that there could be a violation of the rules, we informed the Danish Financial Supervisory Authority, conducted a thorough investigation of the incident in question and strengthened our training, routines and processes. In addition, the seriousness of the matter meant that we had to make changes to the organization.”
Alex Viall agreed about the need to focus on a “culture of compliance” asserting that: “It is no surprise that the sort of activity that has been evident before in trading scandals is still possible – training and instilling the right compliance culture remains as a persistent need.”
