Royal Bank of Canada to Pay $35 Million Fine for Illegal Futures Trading -- Update

By Rita Trichur And Maria Armental 

Royal Bank of Canada will pay a $35 million penalty for engaging in illegal futures trading with itself over a three-year period in one of the biggest such cases brought by regulators.

The Commodity Futures Trading Commission, which filed a complaint against RBC in 2012, announced late Thursday that a judge with the U.S. District Court for the Southern District of New York levied the civil penalty against RBC, Canada's second-largest bank by assets.

The penalty was for engaging in more than 1,000 illegal wash sales, fictitious sales, and noncompetitive transactions, between June 1, 2007 and May 31, 2010, according to court documents.

A spokesman for RBC said the bank remains "committed to complying with our regulators' requirements. The settlement is in the best interests of our clients and shareholders, recognizing that continued litigation is costly and uncertain." He declined to comment further.

The wash trade scheme, in which RBC and its subsidiaries acted as both buyers and sellers, was designed to glean tax benefits, the court found. Such trades, which evade the basic pricing mechanisms of financial markets, can be used to generate a commission, improperly boost trading volume or influence prices.

"They involved the trading of the same quantity of the same futures contracts at the same price and time, and therefore achieved a wash result for RBC," the CFTC said.

The CFTC said in its statement that the court found that RBC "knowingly executed" 1,026 such wash sales and other "fictitious sales" involving narrow-based stock-index futures and single-stock futures contracts, and that the trades were designed by "senior RBC personnel,."

RBC was accused of routing the transactions through OneChicago, an electronic futures-trading exchange in Chicago that is partly owned by CME Group Inc. Representatives from CME couldn't immediately be reached for comment.

The court also entered a consent order for a permanent injunction which forces the Toronto-based bank to comply with the CFTC's regulations on wash sales to prevent future violations.

Write to Rita Trichur at [e-mail] and Maria Armental at [e-mail]

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