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US regulator sues Canada bank alleging illegal trading scheme

The US Commodity Futures Trading Commission (CFTC) [official website] on Monday filed charges [complaint, PDF; press release] in the US District Court for the Southern District of New York against the Royal Bank of Canada (RBC) [corporate website] alleging that the bank was involved in an illegal futures trading scheme known as "wash trading" from 2007-2010. Under the alleged scheme, RBC and its subsidiaries would hold equal and offsetting amounts of both "narrow-based stock index futures" and "single stock futures" of the targeted security, essentially ensuring that the transaction was a "wash," and that there was no risk in holding the securities. According to the CFTC, the RBC "willfully concealed and made false statements," and arranged and executed the non-competitive trade of futures among its subsidiaries. Hundreds' of millions of dollars worth of futures were allegedly traded in the scheme, in a manner that "disregarded the price discovery principles of the futures market," in order to take advantage of Canadian tax benefits. The CFTC also alleged that RBC gave the appearance that the trades were the result of independent decision making processes by the bank and its subsidiaries, but that in actuality, the trades were controlled by a small group of RBC senior personnel. A spokesperson for the RBC has denied the charges [Toronto Star report] stating that the trades complied with CFTC guidelines and were done in a transparent and well-documented manner. RBC has also indicated that they will vigorously defend against the charges. The CFTC is seeking injunctive relief, as well as civil monetary penalties.

The CFTC has been tasked with regulating the derivatives market as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act [text, PDF]. The Act was signed into law [JURIST report] by President Barack Obama in July 2010 and created the new regulatory council to monitor financial institutions in order to prevent companies from becoming "too big to fail." In addition to creating the US Financial Stability Oversight Council (FSOC), the legislation also gives the Federal Reserve [official websites] new oversight over the largest financial institutions, creates a bureau of consumer protection, introduces multitudes of new regulations on derivatives and other financial instruments and limits the amount of capital banks can invest in hedge funds. JURIST contributor Andrew Cali-Vasquez argues that position limit regulations may carry unexpected consequences [JURIST op-ed] that "could impinge upon the operations of domestic businesses by reducing the availability of financing."

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Paper Chase is JURIST's real-time legal news service, powered by a team of 30 law student reporters and editors led by law professor Bernard Hibbitts at the University of Pittsburgh School of Law. As an educational service, Paper Chase is dedicated to presenting important legal news and materials rapidly, objectively and intelligibly in an accessible format.

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