UPDATE 2-UK watchdog fines and bans trader in first gilt-rigging case

Thu Mar 20, 2014 11:12am EDT

* FCA says trader sought to sell 1.2 bln stg holding at inflated price

* Traders called Bank of England to report unusual activity

* Central bank was buying as part of economic stimulus programme (Adds Bank of England, Credit Suisse reaction, more detail)

By Huw Jones

LONDON, March 20 (Reuters) - Britain's financial watchdog has fined former Credit Suisse bond trader Mark Stevenson 662,700 pounds ($1.1 million) in its first enforcement action for manipulating the 7.2 trillion pound UK government bond market.

The Financial Conduct Authority (FCA) said it had also banned Stevenson from the industry for ramping up the price of a bond in the hope of creaming off a bigger profit during a Bank of England bond-buying operation on Oct. 10.

The FCA said that Stevenson, who has nearly 30 years' trading experience, intended to sell his 1.2 billion pound holding to the Bank of England for an artificially high price.

The central bank's bond-buying programme, known as quantative easing (QE), involved the Bank purchasing UK government bonds, known as gilts, to stimulate markets and boost the economy.

A statement from the FCA said that on the day in question Stevenson had told a broker that it was easy to profit from QE trading. "We've been loading up with QE trades for months," Stevenson was said to have told the broker, going on to describe QE trades as "cake". The FCA did not name the broker.

As the bond's price rose on Oct. 10 because of Stevenson's bidding, traders began calling the Bank of England to ask why a gilt that normally traded thinly was behaving in that way.

"His unusual trading was reported within 40 minutes and the Bank decided not to buy that gilt as part of QE," the FCA said.

The Bank of England, which has itself become embroiled in allegations that banks manipulated the foreign exchange market, said it was pleased the matter has been resolved.

"The Bank condemns all forms of market manipulation. This process demonstrates the benefits of the Bank working in close co-operation with the FCA," a Bank of England spokesman said.

The incident was the only time that the central bank completely cancelled purchases of a gilt in a QE buyback.

'NO REGARD FOR CONSEQUENCES'

"Stevenson's abuse took advantage of a policy designed to boost the economy, with no regard for the potential consequences for other market participants and, ultimately, for UK taxpayers," said Tracey McDermott, the FCA's director of enforcement.

Stevenson told the FCA he had traded the bond on Oct. 10 in an open and transparent manner and continued to purchase it until it reached what he believed was its fair value.

As a bond trader with significant market experience, Stevenson was able to trade with a large degree of autonomy, designing and implementing his own strategies, the FCA said.

The watchdog said there is no evidence of collusion with traders in other banks in a gilt market that had turnover of 7.3 trillion pounds in 2011. There are about 1.3 trillion pounds of gilts in issue.

Neither Credit Suisse Securities Europe nor any other individuals employed by the bank were subject to criticism, the watchdog added.

Credit Suisse said it cooperated fully with the investigations and agrees with the FCA decision to sanction Stevenson, adding that it was pleased that neither the bank nor any other staff member had been found at fault.

The gilt Stevenson manipulated was UKT (United Kingdom Treasury) 8.75 percent 2017. The bond was issued in 1992, paying 8.75 percent interest until its expiry in 2017.

Stevenson agreed to settle the FCA's investigation early to qualify for a 30 percent discount on a potential fine of nearly 1 million pounds.

The FCA is under pressure from lawmakers to crack down on market abuses and bring individuals to book after banks have been fined nearly $6 billion for rigging the widely used Libor interest rate benchmark.

Michael Ruck, a financial services enforcement lawyer at Pinsent Masons, said that companies and their employees can expect more crackdowns by the FCA as individuals become increasingly willing to blow the whistle on misconduct. ($1 = 0.6014 British Pounds) (Additional reporting by David Milliken; Editing by Clare Hutchison and David Goodman)

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