A U.S. regulator has fined RBC Capital Markets LLC US$5-million for failing to prevent hundreds of “fictitious” offsetting trades even after the investment bank’s parent company, Royal Bank of Canada, was disciplined for similar infractions in 2014.
Traders at RBC’s U.S. capital-markets arm believed the trades were allowed, and used them as a cheaper, less cumbersome way to move positions in futures markets between accounts within the bank. When staff asked a compliance officer whether the trades were appropriate, “the officer did not respond, follow up with the exchange, or provide any formal training until at least May, 2015,” the Commodity Futures Trading Commission (CFTC) said in its ruling.
RBC Capital markets ultimately disclosed the illegal trades to the CFTC, but failed to “fully respond to document requests and subpoenas issued by CFTC staff,” according to the ruling, and tried to dissuade the regulator from looking into RBC’s involvement, “even from a supervisory perspective."
The transactions were a particular form of wash trade, in which the bank acted as both buyer and seller in trades that offset each other so that they produce no financial gain or loss (in effect, a wash). The CFTC found that from December, 2011, until October, 2015, RBC Capital Markets executed at least 385 “noncompetitive, fictitious, exchange for physical [EFP] wash transactions.”
An EFP is a trade in which futures contracts – financial instruments that serve as a promise to buy or sell an asset or commodity for a specific price at a future date as a bet or hedge against changes in the price of that asset – are exchanged for the underlying assets. When the result of those trades is a wash, it could seem innocuous because no one profits. But the CFTC bans wash trades because they send misleading signals that can distort markets. The commission calls the trades fictitious because they involve no competitive bidding, and in some cases, no real change in ownership.
The improper trades went undetected despite a 2014 consent order that RBC, which is Canada’s largest bank by assets, reached with the CFTC over a separate matter in which the bank had made about 1,000 prohibited wash trades in pursuit of tax benefits. At the time, RBC agreed to comply with regulations governing wash trades, and paid a $35-million penalty.
The CFTC found that 217 of the wash EFPs executed by RBC Capital Markets in the United States happened after RBC agreed to that 2014 consent order, and that the bank “failed to adequately implement a reasonable supervisory system overseeing its futures transactions.”
RBC spokesperson Sanam Heidary said in an e-mailed statement: “This matter has been resolved and we have enacted a number of measures to prevent this issue from recurring, including improved processes. We remain committed to working with our regulators and complying with all requirements.”
The CFTC’s ruling, released on Wednesday, also chastises RBC Capital Markets for “other supervisory failures” as recently as May, 2017, including deficiencies in the bank’s compliance manual, and failures to file timely risk-exposure reports.
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