RBC sued over 'wash trades'

US regulators, led by the Commodity Futures Trading Commission (CFTC), sued the Royal Bank of Canada alleging it engaged in illegal futures trades — so-called "wash trades" — worth hundreds of millions of dollars to obtain tax benefits tied to equities and that it made false or misleading statements about those trades.

The complaint was filed by the CFTC in Manhattan federal court, where regulators allege the wash trading scheme took place and misled the exchange.

The CFTC's complaint says the alleged wash trades occurred from 2007 to 2010.

The alleged conduct took place on the OneChicago LLC exchange, where the CFTC says affiliates traded among themselves in a way that undermined competition and price discovery.

According to the article, the CFTC says the wash trades involved RBC affiliates trading among themselves to undermine competition and price discovery on the OneChicago exchange, rather than providing normal arm's-length price discovery in the futures market.

RBC called the lawsuit "meritless" and said it will defend itself. A bank spokesman said they proactively contacted the exchange before trading, that the trades were fully documented, transparent, reviewed by the CFTC and exchanges, monitored for several years, and were permissible under the CFTC's published guidance.

The article reports RBC shares traded at US$58.50 in after-hours trading, down 1.2% from the US market close. RBC also described the lawsuit as "not a financially material event" to the bank.

CFTC enforcement director David Meister said a fundamental purpose of the futures markets is arm's-length price discovery and risk shifting, and that RBC "designed and executed a wash sale scheme that undermined that purpose" and misled the exchange into believing the conduct was lawful.