The U.S. Commodity Futures Trading Commission filed charges against Goldman Sachs & Co. LLC for violating the CFTC's Business Conduct Standards, which apply to swap dealers. Specifically, the CFTC found that Goldman failed to disclose dozens of pre-trade market midpoints (PTMMM) in violation of regulation 23.431; Goldman Sachs failed to communicate with its clients in a fair and equitable manner in accordance with the principles of fair dealing and good faith, violating Rule 23.433.

Goldman admitted that it either failed to disclose any PTMMM or failed to disclose an accurate PTMMM for nearly all "same-day" swaps executed between 2015 and 2016, an act that violated CFTC rules.

The CFTC issued the order, imposing a $15 million civil penalty on Goldman.

Ian P. McGinley, Director of the CFTC's Division of Enforcement, said: "The CFTC Code of Business Conduct is designed to promote transparency and fairness in the swaps market. The CFTC is committed to ensuring that swap dealers comply with these standards so that swap counterparties are provided with disclosures that allow them to evaluate swaps before they enter into them. "Today's CFTC penalty against Goldman Sachs shows that the regulator will aggressively pursue swap dealers who violate these rules of business conduct."

Background of the case

The CFTC investigation found that Goldman entered into dozens of "same-day" stock index swaps with its US clients in 2015 and 2016. In these "same day" stock index swaps, the equity component of the swap is determined on the day that other material terms of the agreed deal are agreed, rather than (typically) the day after the agreement is reached. The investigation found that Goldman did not disclose PTMMM for these swaps to clients, but often disclosed PTMMM for different swap types (similar to T+1 swaps), thus masking the value of same-day swaps.

The investigation found that Goldman speculatively solicited or agreed to same-day swaps with clients only on days and times that were beneficial to its own finances and not in the interests of its clients. In addition, Goldman communicated with clients to make it appear that the same-day swaps were more financially beneficial to the clients than they actually were.

The investigation found that in some instances, Goldman disclosed PTMMM for "T+1" swaps and then outbid PTMMM for "same-day" swaps, leading clients into believing that same-day swaps were more favorable than T+1 swaps when they were not. In fact, the CFTC found that any marginal gains Goldman made on the interest rate portion of its "same-day" swaps were offset by the client's stock trading costs. The regulator argued that Goldman failed to communicate with clients in a fair and equitable manner, boasting about the supposed benefits of "same-day" swaps without informing clients of the costs.