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 The June 2013 disclosure, which Reuters recently reviewed on a
website run by the securities industry regulator FINRA, sheds light
on the basis for a warning by the Federal Bureau of Investigation on
January 8.
The warning, in the form of an intelligence bulletin to regulators
and security officers at financial services firms, said that the FBI
suspected swaps traders at an unnamed U.S. bank and an unnamed
Canadian bank may have been involved in market manipulation and
front running of orders from U.S. government-owned mortgage giants
Fannie Mae <FNMA.OB> and Freddie Mac <FMCC.OB>.
Reuters has since learned that Bank of America's trading practices
regarding Fannie and Freddie are the subject of probes, and that the
investigations are ongoing.
Bank of America spokesman Bill Halldin declined comment when asked
abut the investigations.
The disclosure on the FINRA site doesn't specifically accuse Bank of
America of any wrongdoing.
It says: "We understand that the (U.S. Attorney's Office) is
investigating whether it was proper for the swaps desk to execute
futures trades prior to the desk's execution of block future trades
on behalf of counterparties."
The filing, which identifies the U.S. Attorney's Office in
Charlotte, North Carolina, where Bank of America is based, adds: "We
also understand that the Commodity Futures Trading Commission is
conducting a parallel investigation into the trading issue."
The filing cites the bank as the source of the information.
The disclosure is in a FINRA "BrokerCheck" report on Eric Beckwith,
a former managing director at Bank of America's Merrill Lynch
broker-dealer division in New York. BrokerCheck is an online system
that allows investors to check the backgrounds of brokers for any
regulatory issues or malpractice.
Representatives from the CFTC, and the U.S. Attorney's office in
Charlotte declined comment.
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The filing said investigators are also looking into whether Beckwith
gave accurate information to the CME Group's Chicago Mercantile
Exchange in connection with an investigation by the exchange into
the trading.
Halldin said Beckwith left the firm in
July.
Beckwith could not be reached for
comment. The CME declined to comment.
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. It is a concern for many regulators
as it pushes up the cost of trades entered into by investors, including pension
funds and governments.
In the bulletin, the FBI warned of
"unsophisticated tradecraft" such as hand signals or special ring tones that
traders were using to deliver information about impending orders in the
interest-rate swaps market.
The document also said that the
inspector general's office of the Federal Housing Finance Agency, the regulator
of Fannie Mae <FNMA.OB> and Freddie Mac <FMCC.OB>, is looking into the matter.
Representatives for Fannie Mae and
Freddie Mac declined to comment.
(Reporting by Karen Brettell in New York
and Aruna Viswanatha in Washington; editing by Karey Van Hall and
Martin Howell)
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