Royal Bank of Canada and TD Bank have succeeded their bid to settle a regulatory action brought by the Ontario Securities Commission (OSC) over compliance failures in their FX businesses by paying a combined CAD 24.45 million.
The OSC approved the agreements on Friday, noting that the failures allowed RBC and TD FX traders to share confidential customer information in chatrooms with FX traders at competitor firms.
From 2011 to 2013, OSC says it staff identified “hundreds of instances” in which RBC and TD FX traders disclosed confidential transaction details, such as trade sizes, timing, price, or stop-loss levels, thus providing them with a potentially unfair advantage in the market. RBC and TD’s FX supervisors permitted the exchange of this confidential information, and neither institution imposed a chatroom ban until 2013. OSC says, adding that as a result of inadequate internal controls, the bans were not effectively enforced until 2015.
OSC staff do not allege, and have no evidence of, manipulation of FX benchmark rates.
“These are serious failings by two of the biggest, most sophisticated and well-resourced financial institutions in Canada,” says Jeff Kehoe, director of enforcement at OSC. “RBC and TD had the ability and means to properly monitor use of technology with known compliance risks in their FX trading, yet for more than three years, they failed to adequately do so. As a result, traders were free to engage in self-serving behaviour that put the banks’ economic interests ahead of their customers, other market participants and the integrity of the capital markets.”
As part of its settlement, RBC has agreed to a voluntary payment of $13.552 million to advance the Commission’s mandate of protecting investors, plus a further $800,000 towards the costs of staff’s investigation. TD has agreed to a voluntary payment of $9.3 million to the Commission, plus $800,000 for staff’s investigation.
OSC says the voluntary payments take into account, among other things, the banks’ level of cooperation with staff. In addition to making the payments, both institutions have agreed to conduct audits of the compliance frameworks for their FX businesses.
Following these settlement agreements, the OSC says it will conduct a review of the largest derivatives dealers in Ontario’s compliance oversight for FX trading. OSC staff are asking dealers to assess whether they have sufficient controls to manage the risks faced by their FX trading businesses and the regulator says its staff will review these assessments, and coordinate with other Canadian regulators as appropriate.
“We expect derivative dealers in Ontario to take immediate action to assess their FX oversight programme and confirm their compliance with the Global FX Code of Conduct,” says Kevin Fine, director of derivatives at the OSC. “Any dealers that identify problems with their compliance systems should promptly self-report to the OSC.”