RBC Capital Markets LLC
CBOT RULE VIOLATION[S]: (Legacy) Rule 538. Exchange for Related Positions (in part)
538.B. Independently Controlled Accounts
The opposing accounts to an EFRP transaction must be (a) independently controlled accounts with different beneficial ownership; (b) independently controlled accounts of separate legal entities with common beneficial ownership; or (c) independently controlled accounts of the same legal entity, provided that the account controllers operate in separate business units.
For EFRP transactions between accounts with common beneficial ownership, the parties to the trade must be able to demonstrate the independent control of the accounts and that the transaction had economic substance for each party to the trade.
538.C. Related Position (in part)
The related position component of an EFRP must be the cash commodity underlying the Exchange contract or a by-product, a related product or an OTC derivative instrument of such commodity that has a reasonable degree of price correlation to the commodity underlying the Exchange contract. The related position component of an EFRP may not be a futures contract or an option on a futures contract.
Each EFRP requires a bona fide transfer of ownership of the underlying asset between the parties or a bona fide, legally binding contract between the parties consistent with relevant market conventions for the particular related position transaction.
Rule 534. Wash Trades Prohibited
No person shall place or accept buy and sell orders in the same product and expiration month, and, for a put or call option, the same strike price, where the person knows or reasonably should know that the purpose of the orders is to avoid taking a bona fide market position exposed to market risk (transactions commonly known or referred to as wash trades or wash sales). Buy and sell orders for different accounts with common beneficial ownership that are entered with the intent to negate market risk or price competition shall also be deemed to violate the prohibition on wash trades. Additionally, no person shall knowingly execute or accommodate the execution of such orders by direct or indirect means.
Pursuant to an offer of settlement in which RBC Capital Markets LLC (RBCCM) neither admitted nor denied the rule violations upon which the penalty is based, on April 27, 2017, a Panel of the Chicago Board of Trade (“CBOT”) Business Conduct Committee (“Panel”) found that between December 2011, and October 2015, RBCCM executed numerous Exchange for Physical (“EFP”) transactions in CBOT Interest Rate markets that failed to satisfy the Rules of the Exchange in one or more ways. Specifically, RBCCM traders from the same trading desk and with control over RBCCM-owned trading accounts, entered into EFP trades in which these accounts were on both sides of the transactions. While the purpose of the transactions was to transfer positions between the RBCCM accounts, the manner in which the trades occurred violated the Exchange’s prohibition on wash trades. The Panel found that RBCCM thereby violated CBOT Rules 534 and (legacy) 538.B. and C.
In accordance with the settlement offer, the Panel ordered RBCCM to pay a $175,000 fine. In accepting RBCCM’s offer of settlement, the Panel considered that following the Exchange’s initial inquiries regarding the firm’s EFP transactions, RBCCM conducted an internal review of hundreds of such transactions, and disclosed its findings to the Market Regulation Department.