CFTC fines VTB Group $5M for unlawful trade executions

The CFTC fines VTB Group $5 million, after discovering that VTB and VTB Capital were executing unlawful trades. How did the Russian bank react?

20 September, AtoZForex – The US Commodity Futures Trading Commission (CFTC) yesterday has issued an Order filing and at the same time settling charges against Russian banking institutions JSC VTB Bank (VTB), with headquarters in St. Petersburg and VTB Capital PLC (VTB Capital).

CFTC fines VTB Group for unlawful trade executions

The US regulator’s Order follows illegal banks’ activities, namely “executing fictitious and noncompetitive block trades in Russian Ruble/U.S. Dollar (RUB/USD) futures contracts, which were cleared through the Chicago Mercantile Exchange (CME).  VTB Capital, a U.K.-incorporated bank, is 94% owned by a holding company that, in turn, is 100% owned by VTB.”, as reported by the CFTC.

The US regulator’s Order finds that in the period from December 2010 to June 2013, VTB and VTB Capital executed over 100 block trades in RUB/USD futures contracts on the CME. The notional value of these trades accounts for approximately $36 billion, as it is reported by the CFTC. Following on this, due to significant capital requirements enforced on over-the-counter (OTC) swap counterparties in the transaction with Russian-domiciled VTB, the banking institution could not beneficially hedge its RUB and USD cross-currency risk.

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These block trades were performed to transfer VTB’s cross-currency risk to VTB Capital at more favorable prices tan VTB could have had from the third-parties. As it is stated by the regulator is the official Order:

“VTB Capital would then hedge this cross-currency risk in OTC swaps with various international banks, allowing VTB and VTB Capital to accomplish through risk-free, non-arms-length transactions in the futures market what VTB was unable to accomplish through the swaps market, the Order finds.”

These block trades were artificial sales, which caused the CME to report the prices as not true and bona fide, which breaches CEA regulations. Moreover, the block trade prices did not consider the circumstances of the markets and parties to the block trades and therefore failed to meet the CME requirements. The outcome emerged as the trades were noncompetitive, which violates the CFTC Regulation.

What is the penalty for VTB and VTB Capital?

Therefore, the Order from the US watchdog obliges VTB and VTB Capital to pay $5 million civil monetary penalties as a result of their illegal conduct.

Additionally, the official Order from CFTC obliges VTB and VTB Capital to institute, update and strengthen the policies and procedures tailored to deter, detect and currency any potential fictitious or noncompetitive trading on US markets. According to the regulator, this violates the Commodity Exchange Act (CEA) and a CFTC regulation.

Furthermore, VTB and VTB Capital are required to conduct training related to ethics, compliance and legal requirements with regards to fictitious or noncompetitive trading under the CEA and CFTC regulations.

Also, the Order from CFTC requires VTB and VTB Capital to stop further breaches of the CEA and CFTC Regulation.

How did the Russian bank react?

As CFTC fines VTB Group, the VTB’s statement published today on the official website of the bank states:

"The stock-exchange transactions, which have been investigated by the U. S. Commodity Futures Trading Commission, were executed in line with all the rules of the Chicago Mercantile Exchange and there have been no allegations against the bank. About a year ago the commission filed a lawsuit against one of the western banks charging it with serious claims for several transactions. Most likely, this precedent made the Commission review its practices of executing this kind of deals at the stock exchange and consequently impose a ban on address operations within one group. This ban has applied to all of the banks working in the U.S.

Therefore this concerns solely the regulation of the banks’ operations in the US market. After several meetings with VTB Capital in New York, Kansas and Washington, the CFTC has concluded that the bank was working strictly in accordance with the appropriate market practices at that time. However, due to the revision of the rules guiding the execution of deals on the stock exchange, the CFTC decided not to acknowledge the Group’s activity on several previously closed transactions as correct. Taking into consideration the fact that Chicago Mercantile Exchange had earlier allowed such transactions and that VTB cooperated fully with the CFTC, the bank was fined the minimum amount possible".

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