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Banking regulator won't get involved in RBC suit

Julie Dickson, head of the Office of the Superintendent of Financial Institutions (OSFI), waits to testify before the Senate banking committee in Ottawa November 23, 2011.


Canada's banking regulator has sent a strong message that it doesn't plan to get involved in the lawsuit a U.S. regulator has launched against the Royal Bank of Canada over alleged improper trading.

For now, Julie Dickson, head of the Office of the Superintendent of Financial Institutions, said she intends to leave the matter up to the courts in New York.

"Both sides are pretty convinced they are right so we'll see how that plays out in court," Ms. Dickson said in Toronto on Thursday, following a speech where she called for more board oversight of bank lending practices in Canada.

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RBC is facing a lawsuit from the Commodity Futures Trading Commission in Washington, which alleges Canada's largest bank orchestrated a vast network of improper trades. RBC has called the allegations "absurd" and intends to defend itself.

According to court documents filed by the CFTC on Monday, the bank is accused of trading large blocks of shares and futures between its subsidiaries to take advantage of Canadian tax credits on dividend-paying stocks listed in Canada.

RBC held the shares for a year to gain a tax credit, but sold derivatives on those shares in the U.S. to mitigate the risk of stock prices fluctuating. The regulator alleges that since a separate arm of RBC was the purchaser of those derivatives in large block trades that were later reported to the OneChicago exchange in Illinois, the deals were done without respect to market prices and were hidden from the market, therefore violating U.S. trading rules.

Canadian regulators were caught off guard by the lawsuit, including the Canadian Revenue Agency and OSFI, which were given very little notice that a lawsuit was coming. They are now looking into the matter.

Ms. Dickson said her organization has memorandums of understanding with other bank solvency regulators for advance notice of cases when they are launched, but those agreements are not in place with securities regulators such as the CFTC.

OSFI has since held discussions with RBC about the allegations, but since it regulates bank solvency and does not have an investigative arm, pursuing the matter further in Canada, if needed, would likely not fall to Ms. Dickson's office. "It's not one that's within our expertise either," Ms. Dickson said.

Sources close to the matter say OSFI held conversations with RBC this week on behalf of Canadian authorities, given the regulator's knowledge of the banking sector. Canadian regulators are undecided on how or if they will proceed.

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RBC argues it was given permission for the trades after it notified the CFTC about the moves as far back as 2005, prior to executing the hedging strategy. The bank's lawyer, Arthur Hahn, a partner at Katten Muchin Rosenman LLP in Chicago, said RBC was never told to stop doing the trades, and decided on its own to halt them after the CFTC began asking more questions several years later.

"We believe we fully and accurately reported [the trades]to them at the initial time, and we believe that there is simply no question that the trading fit within [the CFTC's]guidance," Mr. Hahn said in an interview this week.

Ms. Dickson said Canadian banks are responsible for adhering to regulations in the countries they operate, but would not comment on the RBC case specifically.

"All banks around the world, especially big global banks, are involved in many different markets, [and]deal with many different regulators," Ms. Dickson said. "Issues are always arising, you would not expect there to never be any issues."

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Senior Writer

Grant Robertson is an award-winning journalist who has been recognized for investigative journalism, sports writing and business reporting. More

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