The U.S. Commodity Futures Trading Commission is charging Royal Bank of Canada with conducting a multi-hundred million dollar wash sale scheme, and deceiving a futures exchange about the nature of the trading.
The CFTC announced on Monday that it has filed a complaint in federal district court in New York charging RBC with conducting a wash sale scheme in connection with exchange-traded stock futures contracts. It also alleges that RBC willfully concealed, and made false statements concerning, material aspects of its wash sale scheme from OneChicago, LLC, an electronic futures exchange, and CME Group, Inc., the entity that exercised the regulatory compliance function for OneChicago. The allegations have not been proven.
In allegations unveiled today, the regulator charges that from June 2007 to May 2010, RBC traded hundreds of millions of dollars’ worth of futures contracts with two of its subsidiaries that it reported as ‘block’ trades on OneChicago. It charges that this trading activity, which accounted for the majority of OneChicago’s volume during the period, constituted unlawful non-competitive trades, wash sales and fictitious sales.
The CFTC says the 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 realize lucrative Canadian tax benefits from holding certain public companies’ securities in its Canadian and offshore trading accounts.”
The CFTC says that prior to each trade, RBC allegedly identified stocks in U.S. and Canadian companies that it believed would generate a tax benefit. RBC and a subsidiary then allegedly bought and sold these stocks, and also bought and sold 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 January 2005 to April 2010, RBC unlawfully concealed material information from, and made false statements to, CME Group concerning its trading activity. Specifically, it alleges that when it described the trades to CME Group, RBC falsely stated that its trading was conducted at arm’s length, and 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 its futures trades.
“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,” said David Meister, the director of the CFTC’s division of enforcement. “As we allege, 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. Today’s action should make clear that the CFTC will not hesitate to bring charges against even the most sophisticated market participants who unlawfully exploit the futures markets for their own gain.”
In its litigation, the CFTC seeks civil monetary penalties and a permanent injunction against further violations.