The Tribune

By NATARIO McKENZIE

Tribune Business Reporter

nmckenzie@tribunemedia.net

THE ROYAL Bank of Canada (RBC) has rejected allegations by US regulators that it devised a "massive wash trading scheme", branding them as "unwarranted".

Responding to allegations in a lawsuit filed by the Commodities and Futures Trading Commission (CFTC), in the US southern district court of New York on Monday, RBC said the CFTC had been made aware of the transactions since 2005, and called the lawsuit "meritless".

The CFTC, in its lawsuit alleged that Royal Bank engaged in the non-competitive selling of exchange-traded stock futures contracts with its Bahamas and Cayman Island branches.

It was alleged to have conducted this activity as 'block' trades through the OneChicago futures exchange, using "wash and fictitious sales" that were not independent, arm's length sales between two different counterparties.

This, the CFTC alleged, breached US law and was designed to enable Royal Bank to access tax benefits from holding certain public companies' securities in Canadian and offshore accounts.

In response to the allegations, RBC said in a statement: "The CFTC has been aware of these transactions since 2005. These transactions were done in accordance with market terms, regulations and process. This is not a financially material event to RBC, but we do take this situation seriously and intend to vigorously defend our reputation.

"Before we made a single trade, we proactively contacted the exchange to seek its guidance. These trades were fully documented, transparent, and reviewed by both the CFTC and the exchanges, and for the next several years were monitored by them. RBC's trading was permissible in 2005, was reviewed six months later by the CFTC and encountered no objection, and it is permissible today under the CFTC's published guidance.

RBC added: "Given no objection to the trading activity by either the exchange or the CFTC in 2005, it is absurd to now claim these trades were either fictitious or wash sales. This lawsuit is meritless. The block trades in question were entered into by independent RBC legal entities with the intent to establish genuine, bona fide positions, based on the CFTC's long-standing regulatory guidance. They were executed at competitive market pricing and no market participants suffered any negative impact, nor has the CFTC alleged any pricing irregularities."

US regulators alleged that Royal Bank of Canada blamed staff at its Bahamian branch for playing the lead role in devising the scheme, worth hundreds of millions of dollars, which it executed through this nation and the Cayman Islands.

The CFTC lawsuit alleged that when OneChicago's regulatory overseer began to query the trades, the general counsel for Royal Bank's capital markets unit replied, on November 17, 2005, that its Bahamian branch staff played the lead role in devising the arrangement.

The general counsel allegedly replied: "The idea of engaging in OneChicago single stock future block transactions originated with the staff in our Bahamas office.

"The decision to engage in the block transactions was then made between the Royal Bank affiliates involved in the transactions (primarily RBC (Bahamas branch) and CMA) after discussions between them."

The CFTC, though, alleged that the strategy had been developed at Royal Bank's corporate level, including by the head of global arbitrage and trading for its Caribbean branches.

"The idea of engaging in OneChicago single stock future block transactions did not 'originate' with the staff in [RBC' s] Bahamas office, but was instead conceived by CFG Member 1 and proposed to RBC management when CFG Member 1 was a managing director of RBC Capital Markets working in RBC's London office," the CFTC lawsuit alleged.

"The RBC branches and subsidiary that engaged in SSF trading did not 'independently come up with the idea and strategies to trade' SSFs. Instead, CFG Member 1 devised the idea to trade SSFs between RBC-affiliated counterparties and created the futures trading strategies for both counterparties to the trades."

There is no suggestion that Royal Bank of Canada's Bahamas then-branch, which is now a subsidiary, nor any of its employees, officers or directors, did anything wrong in relation to the scheme described by the CFTC.

The CFTC alleged that Royal Bank of Canada attempted to give the trades "the appearance of being the result of independent decisions by its branches and subsidiaries to buy and sell futures contracts", when instead they were controlled and devised by a small group of senior executives.

The US regulator claimed that between 2005 and May 2010, transactions between the Bahamas/Cayman Islands and a Luxembourg affiliate accounted for 51 per cent of the volume in a particular type of trade on OneChicago. In 2006 and 2007 respectively, these deals accounted for 87 per cent and 72 per cent of this particular trade type.