The Commodity Futures Trading Commission filed an enforcement action against the Royal Bank of Canada alleging a years long, riskless wash sale scheme conducted by a small group of RBC personnel to generate certain lucrative Canadian tax benefits. The trades were not conducted in an arms-length manner between the counterparties as required by law or in accord with the price discovery purposes of the futures market, according to the complaint filed by the agency. CFTC v. Royal Bank of Canada (S.D.N.Y.).

Beginning in June 2007 and continuing to May 2010, RBC traded hundreds of millions of dollars worth of narrow based stock index futures and single stock futures contracts with two of its subsidiaries. Prior to each transaction the bank identified stocks in the U.S. and Canada that would could be used to create certain tax benefits. The bank and a subsidiary then bought and sold those stocks as well as the stock index futures and single stock futures. The trades were conducted in a riskless manner so that the profits and losses would wash to zero. The transactions, reported as block trades, were arranged by a small group of senior RBC personnel acting for the financial institution. The purpose of the transactions was to realize Canadian tax benefits from holding the securities of certain public companies in Canada and offshore trading accounts.

The complaint also claims that RBC attempted to conceal the transactions from CME Group. When the transactions were reported to CME Group RBC falsely stated that the single stock futures trading was at arms-length between two counterparties. It concealed the fact that all the trades were orchestrated by a small group within the bank. RBC also concealed the fact that the transactions were designed to exclude non-RBC affiliated parties from its futures trades.

The complaint seeks a permanent injunction and a civil monetary penalty. The case is in litigation.

Tagged with: , ,