As the theme tune for Australia’s most important cultural export suggests, everybody needs good neighbors. Nowhere is this truer than in the international financial community, a space that operates on mutual support, trust, and transparency. Without these vital building blocks, we find ourselves on shaky foundations.
A recent enforcement action from Norway’s financial supervisory authority (FSA, or Finanstilsynet) saw Danske Bank hit with a $4.4 million (50 million Norwegian Krone) fine for market manipulation related to a bond issued on behalf of the Norwegian government. The investigation not only unearthed signs of distinctly ‘unneighborly’ conduct, but also “illuminating” evidence of market manipulation being orchestrated via digital communication channels.
Breaking bonds
In February 2023, Danske Bank participated in the syndication of a 10-year government bond worth $1.9 billion (NKr 22 billion) on behalf of Norges Bank, Norway’s central bank, which issued the bond on behalf of the Norwegian government.
The Norwegian swap rate was used as the reference rate for the bond’s yield and price. However, in cooperation with Danish supervisory authorities, Finanstilsynet’s investigation found “a significant price increase in the relevant interest rate swaps” prior to the time of pricing, with the regulator believing that:
“The swap rate was driven up by Danske bank to an abnormal or artificial level at the time of pricing, and that the trades were carried out based on a deliberate strategy and in a situation where [Danske Bank] profited from a high effective yield.”
“Stop doing it mate. It’s on the f***ing chat.”
Danske Bank’s “deliberate strategy” to drive up the swap price was laid bare when Finanstilsynet reviewed “a significant volume” of information from communications channels. This “illuminating” data came from a range of channels, including Squawk Box, audio recordings of telephone conversations, Microsoft Teams chats, e-mails, and Bloomberg terminal chats.
Finanstilsynet noticed a pattern of “frenetic behavior” by an individual trader found to have “pushed” the interest rate swap during the bond syndication, with higher levels of activity peaking as the moment of pricing approached. The trader was observed to have “shouted” a volley of instructions at a broker during the syndication. The broker’s response shows an awareness not only of the potential legal implications of the activity itself, but also of communications around the activity taking place on an archived channel:
“Stop doing it mate. It’s on the f***ing chat.”
The trader littered various communications channels with classic warning signs of market manipulation and misconduct, openly speaking to the risk team about price increases, urging contacts to “keep this to yourself” as they “made a killing” and, in an especially colorful example, declaring that Norges Bank “got f***ed” by the deal, which Finanstilsynet believes refers to the effects of the artificially inflated swap price.
The case is a clear example of the importance of complete communications data being accessible and shareable with regulators. In this instance, Finanstilsynet was able to review this data to identify the precise sequence of events, and which employees were involved. Danske Bank were able to provide this data comprehensively as part of their self-reporting, helping to mitigate some of the investigatory impact.
Data completeness is becoming increasingly vital, as regulators take a dim view of firms who are unable to provide communications data that is requested during investigations. With communications monitoring and surveillance solutions becoming ever more advanced, noticing the tell-tale signs of market manipulation and acting on them before they become a matter for regulators is a priority.
Coming clean
In its summary of the investigation, Finanstilsynet emphasized that Danske Bank had self-referred to Danish supervisory authorities on the matter, which had been considered a mitigating factor. Cooperation with investigations and self-reporting to regulators being considered as a mitigating factor continues to be a growing regulatory theme.
In a statement, Danske Bank said it had “informed the Danish FSA that the bank had observed conditions internally that led to suspicion of possible market manipulation,” with Carolina Crevatin Martin, Head of Markets at Danske Bank stating that:
“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.”
These organizational changes are reported to include strengthened internal guidelines and training as part of a “comprehensive study” of the incident, as well as a “forensic review” by the bank’s internal audit function that will share further findings with Norges Bank.
Bank v. Bank
In Norges Bank’s summary of the case, Gaute Langeland, Executive Director of Markets, emphasized the important role of Finanstilsynet in upholding market integrity as well as policing market abuse:
“Norges Bank takes a grave view of the incident described in Finanstilsynet’s decision. Well-functioning financial markets are important for Norges Bank and government debt management. Trust between market participants is fundamental. It is advantageous for the market that Finanstilsynet uncovers and follows up illegal and unacceptable conduct.”
The case has resulted in Norges Bank working to “closely follow up” with Danske Bank and hold “constructive talks” around the ongoing investigation.
A turning point for Nordic regulation?
While the cross-border nature of the market manipulation and enforcement action may have stopped short of causing an “international incident,” the silver lining may mean it results in closer ties and more effective cooperation between Scandinavian banks and Scandinavian regulators.
Either way, Finanstilsynet’s latest action marks a clear shift in tone from the regulator – displaying a more pointed approach to market oversight, and the need for clear compliant communication strategies for Nordic banks.
The key takeaway here should be that, whether fessing up and self-reporting leads to mitigation and better cooperation or not, regulatory expectations are that firms take all the necessary steps to ensure that market manipulation doesn’t happen in the first place. From capturing and archiving all business-related communication, to implementing surveillance to monitor and flag illicit activity – as the regulator shifts focus, firms should be ready to show that they’ve taken steps to mitigate the risk of non-compliance.
