Royal Bank of Canada (RBC), Canada’s largest bank, was sued by the Commodity Futures Trading Commission (CFTC) in April for alleged illegal wash trades tied to equities worth millions of dollars in tax benefits.
According to the CFTC, RBC made false and misleading statements about the trades from 2007 to 2010 in which affiliates traded among themselves at OneChicago in a way that circumvented competition and price discovery.
“A fundamental purpose of the futures markets is to provide an arm’s-length mechanism for market participants to discover prices and shift risks associated with products traded in those markets,” CFTC enforcement director David Meister said in an e-mail statement. “RBC not only designed and executed a wash sale scheme that undermined that purpose; it went a step further and misled the exchange into believing that its conduct was lawful.”
RBC defended itself in a statement: “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.”
Andrew Stoltmann, securities lawyer, says many of the charges likely will come down to what was disclosed vs. what needed to be disclosed. “A reply to the argument that [RBC] already disclosed everything to the proper regulators is built into the allegations,” he says.
Stoltmann suspects the CFTC has picked up enforcement action over the last couple years as a way to gain credibility in Washington. “All of these regulators are really political organizations to a certain extent,” he says. “The CFTC wants to establish that it’s not the 98 lb. weakling anymore and [it] can bring a legitimate case against the largest bank in Canada. It certainly would be a good way for it to earn some respect.”
A OneChicago spokesperson declined to comment.