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With the benefit of hindsight, executives at Royal Bank of Canada and Toronto-Dominion Bank must be kicking themselves for ever letting their currency traders into chat rooms without adult supervision.

In an all-too-familiar story of compliance failing to keep pace with technology, the Ontario Securities Commission alleged on Monday that RBC and TD traders enriched themselves at the expense of their customers by sharing confidential client information in online platforms over a period of at least three years. On Friday, the market watchdog is expected to announce settlements with the two banks, both significant players in global foreign exchange markets.

A similar scandal rocked bond markets back in 2012, when traders at a number of global banks (but not RBC and TD) were caught colluding in private chat rooms to manipulate benchmark interest rates such as LIBOR, the London Interbank Offered Rate. U.S. and British regulators subsequently hammered the banks with US$9-billion in fines.

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RBC, TD currency traders shared confidential customer data, OSC alleges as it pursues settlements

What’s going to haunt RBC and TD brass, and garner the full attention of the regulator, is their senior executives’ failure to supervise the currency traders and keep client information confidential, despite numerous signs that something was amiss.

Understanding the OSC’s allegations against the two banks requires a quick lesson in the dynamics of a currency desk. Currency traders are paid based in large part on the volume of business they do, and the profit or spread between buyer and seller that they realize on each transaction. The currency desk also trades with the bank’s money, and shares in any profits. This crowd is always looking for an edge, for insight into where markets are heading. They swap information over the phone, in pubs, at the gym and, in recent years, on electronic messaging services, such as chat rooms. Traders try to ferret out what the OSC described as “market flow,” or information on who is buying and selling currencies and the specifics of their orders, and “market colour,” or data on why currency prices are moving up or down.

Both RBC and TD have explicit rules prohibiting disclosure of their customers’ names in chat rooms. But the OSC alleges the banks failed to provide guidelines on sharing other confidential information, such as the size and terms of their clients’ orders. “While traders were encouraged to seek and use ‘market flow’ and market ‘colour’ in the course of their trading, there was no clear indication of what, aside from customer names, was impermissible and what was permitted,” the OSC’s statement said. “Consequently, confidential information including specific transaction details was disclosed.”

Imagine a poker game where you know the cards in rival players’ hands. RBC and TD currency traders enjoyed that kind of advantage when they shared specific details on customer orders.

Senior members of the currency trading teams allegedly broke the rules. A TD managing director, an executive with supervisory responsibilities, is alleged to have placed friendship above fiduciary duty by disclosing the specifics of client orders to a former colleague, who moved to a rival bank. The OSC alleges these exchanges were “a breach of TD policies and a breach of confidentiality.”

In what’s become a commonplace occurrence, the traders’ own texts are coming back to haunt them. According to the OSC, when a trader at a rival bank sent a message that said: "mate the only reason you’re up this year is cause of my info,” an RBC trader replied: "i agree ur tips have been hot this year.”

The OSC alleges RBC and TD traders started disclosing confidential information in chat rooms in 2011, and that executives at both banks realized there were potential problems by the summer of 2012, when the LIBOR scandal broke and some banks moved to ban employee participation in electronic forums. The market watchdog alleges RBC’s foreign exchange operating committee discussed the issue in September, 2012, but decided against placing restrictions on chat rooms at that time.

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Both banks changed course and imposed formal bans on chat rooms in the fall of 2013. According to the OSC’s statement on TD, “from an operational perspective, the ban was insufficient. In chats, various traders discussed alternative means of communication, such as other chatrooms, WhatsApp and the telephone.” And the OSC alleges RBC didn’t fully fix its chat room compliance issues until 2015.

The banks, and public companies of all stripes, are justifiably fixated on doing business to the highest ethical standards, to maintain their elusive social licence and the trust of clients. According to the regulator, the country’s two largest banks failed to meet that standard. The OSC said RBC and TD “did not sufficiently promote a culture of compliance in the foreign exchange trading business," an allegation that should serve as a call to action at these institutions.

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