Bloomberg News

RBC to Defend Itself Against CFTC Suit Rather Than Settle

April 09, 2012

Royal Bank of Canada has chosen to challenge the Commodity Futures Trading Commission in court instead of settling over allegations it engaged in illegal futures trades because it said it didn’t break any rules.

“It was a conscious decision to defend ourselves vigorously and we made that decision because we believe we didn’t do anything wrong,” said Arthur Hahn, a Chicago-based lawyer defending Canada’s biggest bank.

Royal Bank is being sued by the regulator over claims it engaged in illegal futures trades worth hundreds of millions of dollars to garner tax benefits tied to equities. The Toronto- based lender made false and misleading statements about “wash trades” from 2007 to 2010 in which affiliates traded among themselves in a way that undermined competition and price discovery on the OneChicago LLC exchange, the CFTC said in a complaint filed April 2 in Manhattan federal court.

“All of the transactions in question here were within standard rules and the guidances put out by the commission,” Hahn said in an interview. “We don’t think we did anything wrong, it’s that simple.”

Royal Bank enlisted affiliates to help carry out hundreds of futures transactions done off-exchange and then reported to OneChicago as block trades between independent affiliates, according to the CFTC.

“These were legitimate block trades, these were legitimate trades between affiliates,” said Hahn, a partner with Katten Muchin Rosenman LLP (1161L:US).

“No Injury”

The trades, which resulted in Royal Bank not having a financial position in a market, were conducted for Canadian tax benefits tied to holding certain stocks, the CFTC said in its statement. The transactions, involving single-stock futures and narrow-based indexes, were used to hedge the risk of holding the equities, according to the statement.

“The trades all took place at absolutely appropriate calculable market prices,” Hahn said. “There was no injury to anyone and we followed the rules.”

Between 2006 and 2010, the narrow-based index trades between a Toronto-based bank account and RBC Europe Ltd., a London-based bank subsidiary, represented all of the narrow- based index volume on OneChicago, the CFTC said in the complaint. Senior members of the bank’s Central Funding Group determined the prices and contracts traded.

From 2005 to 2010, RBC concealed material information and made false statements about the trades to CME Group Inc. (CME:US), which had regulatory oversight of the exchange, according to the CFTC. RBC’s responses to CME questions about the trades “concealed information concerning the central role” of the Central Funding Group employee and the bank’s single-stock futures trades, CFTC said.

“We believe we followed the rules and to be absolutely certain we explained what we were doing before we started doing it,” Hahn said. “And we disclosed it to the exchange, who communicated to the commission.”

Regulators Operate Differently

Julie Dickson, who heads Canada’s Office of the Superintendent of Financial Institutions, which is monitoring the RBC case, declined to comment.

“The only thing I’ll say about the Royal Bank case is, when you look at the press releases, both sides are pretty convinced that they’re right, so we’ll see how that plays out in court,” Dickson told reporters after giving a speech in Toronto April 5.

She said while solvency regulators such as OSFI cooperate and communicate with one another, securities regulators such as the CFTC operate differently.

“In my experience, you don’t get warning,” Dickson said. “If you do get advance notification, it’s virtually close to the hour when something’s being announced. And that’s not unusual. Securities regulators operate under a different framework.”

Royal Bank has 60 days to file its statement of defense in the U.S. court.

To contact the reporters on this story: Doug Alexander in Toronto at dalexander3@bloomberg.net; Silla Brush in Washington at sbrush@bloomberg.net

To contact the editors responsible for this story: David Scheer at dscheer@bloomberg.net; David Scanlan at dscanlan@bloomberg.net


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