The U.S. Commodity Futures Trading Commission (CFTC) filed a complaint in federal district court in New York on April 2, 2012, charging the Royal Bank of Canada (RBC) with a multi-hundred million dollar wash sale scheme involving exchange-traded stock futures contracts. The complaint alleges RBC willfully concealed material aspects of the scheme from OneChicago, LLC and CME Group, Inc.
From June 2007 to May 2010, RBC allegedly engaged in non-competitive trading of hundreds of millions of dollars’ worth of narrow-based stock index futures (NBI) and single stock futures (SSF) contracts with its subsidiaries, reporting these as “block” trades on OneChicago. The CFTC claims this activity constituted unlawful non-competitive trades, wash sales, and fictitious sales, representing the majority of OneChicago’s volume during the period.
According to the complaint, RBC’s trading wasn’t conducted at arm’s length, as required by law, but was instead orchestrated by a small group of senior personnel. The scheme was allegedly designed to secure lucrative Canadian tax benefits by holding securities in Canadian and offshore accounts. RBC reportedly identified stocks that would generate a tax benefit, then bought and sold those stocks alongside NBI or SSF futures contracts, ensuring positions, profits, and losses washed to zero – a financial nullity while still allowing RBC to claim tax advantages.
The CFTC further alleges that from January 2005 to April 2010, RBC unlawfully concealed information from, and made false statements to, CME Group regarding its SSF trading. RBC reportedly falsely claimed its SSF trading was conducted at arm’s length and concealed that the strategy was created and managed by senior personnel, as well as intentionally excluding non-RBC affiliated parties from the 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,” stated David Meister, 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.”
While specific penalties weren’t detailed in the initial announcement, the CFTC’s complaint seeks civil monetary penalties and injunctive relief against RBC.
Source: CFTC.gov
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