A logo on Royal Bank Plaza is pictured on Bay Street in Toronto on July 25, 2014.Darren Calabrese/The Globe and Mail
After months of radio silence from Royal Bank of Canada on plans for its proprietary trading arm, we finally know what it's doing with the business.
To comply with the Volcker Rule, which bans banks from engaging in most forms of proprietary trading (trading for their own benefit, rather than for commissions) in the U.S., RBC exited roughly half of its 'prop' positions last quarter.
The remaining half either already complies, or will be tweaked to comply, with the new regulation. The Volcker rules allow certain forms of proprietary trading, so long as they benefit clients – meaning banks can prop trade if they are making markets, for instance.
RBC's decision to sell half of its proprietary portfolio comes after U.S. regulators blocked its proposal to turn the division into an independent hedge fund, and then invest money into the fund.
The exit came at a volatile time in credit markets. From mid-September to late October, bond yields went wild, plummeting and then quickly gaining back a good chunk of their drops.
Such volatility at a crucial time helps to explain why RBC had 10 days of trading losses last quarter, which chief risk officer Mark Hughes said was "highly unusual and reflects the fact that we exited certain proprietary strategies," on a conference call. The prop positions that RBC exited were largely tied to credit trades.
When reporting its fourth quarter earnings Wednesday, RBC noted the exit resulted in $75-million of lost revenue and one-time charges. Chief financial officer Janice Fukakusa stressed that such shocks shouldn't be expected in future quarters because the bank is now "well advanced in restructuring our proprietary trading activity."
Historically, RBC's proprietary business generated two to three per cent of the bank's total revenues.
By selling certain proprietary positions, RBC lowered the value of its risk-weighted assets, which freed up some capital and boosted the bank's common equity tier one capital ratio by 16 basis points.
"The remaining strategies will be Volcker-compliant or we wouldn't have kept them," capital markets head Doug McGregor said on the call. "The strategies that would not comply, we have wound down, and the people have left."
Revenues from RBC's interest rate and credit trading business fell a stunning 70 per cent during the quarter – much like BMO's. Both banks incurred one-time charges related to revaluing their derivatives portfolios, and this expense amounted to $105-million for RBC.
Tim Kiladze