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RBC rejects CFTC allegations as “unwarranted”

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Royal Bank of Canada has “vigorously rejected” the Commodity Futures Trading Commission’s (CFTC) allegations that the bank was involved with a “multi-hundred million dollar wash sale scheme”.

On Monday this week The US CFTC announced the filing of a complaint in federal district court in New York charging Royal Bank of Canada (RBC), the Canadian bank and financial services firm doing business in New York, with conducting a multi-hundred million dollar wash sale scheme in connection with exchange-traded stock futures contracts.

The CFTC’s complaint also alleges that RBC willfully concealed, and made false statements concerning, material aspects of its wash sale scheme from OneChicago, LLC (OneChicago), an electronic futures exchange, and CME Group, Inc. (CME Group), the entity that exercised the regulatory compliance function for OneChicago.

According to the CFTC, from at least June 2007 to May 2010, RBC allegedly non-competitively traded hundreds of millions of dollars’ worth of narrow based stock index futures (NBI) and single stock futures (SSF) contracts with two of its subsidiaries that RBC reported as “block” trades on OneChicago.  The CFTC’s complaint alleges that RBC’s NBI and SSF trading activity, which accounted for the majority of OneChicago’s volume during the relevant period, constituted unlawful non-competitive trades, wash sales and fictitious sales.
Specifically, according to the CFTC’s complaint, RBC’s NBI and SSF trades were not negotiated at arm’s length between the counterparties to the trades, as required by law, but were instead designed and controlled by a small group of senior RBC personnel acting on RBC’s behalf.  The trading scheme was allegedly designed as part of RBC’s strategy to realise lucrative Canadian tax benefits from holding certain public companies’ securities in its Canadian and offshore trading accounts.

Prior to each trade, RBC allegedly identified stocks in US and Canadian companies that RBC believed would generate a tax benefit.  RBC and a subsidiary allegedly bought and sold these stocks, and also bought and sold NBI or SSF futures contracts written on the stocks opposite each other.  According to the complaint, RBC’s futures trading was conducted in a riskless manner that ensured that the positions, profits and losses of each RBC counterparty washed to zero, in disregard of the price discovery principles of the futures markets, which resulted in a financial and position nullity for RBC while allowing it to reap the tax benefits.  

In addition, the CFTC’s complaint alleges that, from at least January 2005 to April 2010, RBC unlawfully concealed material information from, and made false statements to, CME Group concerning RBC’s SSF trading activity.  Specifically, the complaint alleges that when RBC purported to describe the trades to CME Group, RBC falsely stated that its SSF trading was conducted at arm’s length between the counterparties to the trades, and concealed the fact that the trading strategy was created and managed by a group of senior RBC personnel acting on RBC’s behalf.  In addition, the complaint alleges that RBC concealed from CME Group the fact that it had intentionally designed its stock futures trading strategy to exclude non RBC-affiliated parties from RBC’s futures trades.

In response to the CFTC’s allegations against RBC for trading activity “that the CFTC reviewed and had full knowledge of”, RBC made the following points:

  • “The CFTC has been aware of these transactions since 2005. These transactions were done in accordance with market terms, regulations and process.

  • “Before we made a single trade, we proactively contacted the exchange to seek its guidance. These trades were fully documented, transparent, and reviewed by both the CFTC and the exchanges, and for the next several years were monitored by them. RBC’s trading was permissible in 2005, was reviewed six months later by the CFTC and encountered no objection, and it is permissible today under the CFTC’s published guidance.

  • “Given no objection to the trading activity by either the exchange or the CFTC in 2005, it is absurd to now claim these trades were either fictitious or wash sales. This lawsuit is meritless.

  • “The block trades in question were entered into by independent RBC legal entities with the intent to establish genuine, bona fide positions, based on the CFTC’s long-standing regulatory guidance. They were executed at competitive market pricing and no market participants suffered any negative impact, nor has the CFTC alleged any pricing irregularities.”

In its continuing litigation, the CFTC seeks civil monetary penalties and a permanent injunction against further violations of the Commodity Exchange Act and the CFTC’s Regulations, as charged

RBC stated: “This is not a financially material event to RBC but we do take this situation seriously and intend to vigorously defend our reputation.”

Related story –

CFTC charges Royal Bank of Canada with multi-hundred million dollar wash sale scheme


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