The CFTC regulates swap trades in the financial markets. Further, the agency uses bounty actions to detect fraud schemes in the swap markets. These swap fraud bounty actions allow investors and financial professionals to anonymously expose fraud and collect large rewards.
What is a Swap?
A swap allows counter parties to exchange (or “swap”) a series of cash flows based on a specified time horizon. The counter parties use a swap agreement to hedge or speculate on the variable cash flows or liabilities in the swap. The swap agreement defines the dates when the cash flows are to be paid and the way they are accrued and calculated.
The swap agreement also defines the variable cash flow or leg of the swap. Counter parties commonly use swaps for uncertain variables such as a floating interest rate, foreign exchange rate, equity price, or commodity price.
Investors Use Swaps to Speculate and Hedge Risks
More specifically, investors use swaps to hedge against certain positions or risks such as changes in interest rates. Investors also use swaps to speculate on future changes in the expected direction of underlying index or currency prices.
The Large Size of the Swap Market Invites Complicated Fraud Schemes
The swap market is one of the largest and most liquid global marketplaces. According to the recent statistics, the notional amount outstanding in over-the-counter interest rate swaps alone was more than $542 trillion. These large values invite complicated fraud schemes.
Swap Investors Typically Customize Swap Agreements Allowing For Complicated Fraud Schemes
There are several types of swaps including currency swaps, equity swaps, and credit swaps. Further, investors commonly customize swaps to the point where there are few standardized swap agreements. In other words, swap contracts cannot be easily traded on an exchange and are not typically standardized. The variety of customized swaps and types of swaps make swap fraud hard to detect.
High End Investors and Financial Professionals Need to Expose Hard to Detect Fraud Through Swap Fraud Bounty Actions
The large variety of swap agreements and amount of wealth in the swaps market make it ripe for hard to detect fraud. For this reason, high end investors and financial professionals need to expose hard to detect fraud in the swaps market.