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OSC approves $24.5M in settlements with TD, RBC over FX traders sharing info | The Star

TORONTO - Canada’s two biggest lenders have agreed to pay nearly $24.5 million in fines to the Ontario Securities Commission to settle allegations that currency traders inappropriately shared confidential information in chatrooms to gain a potentially unfair advantage, and that neither TD Bank nor Royal Bank had adequate controls to keep them in check.

TD and RBC have agreed to voluntary payments of $9,300,900 and $13,552,000, respectively, as part of settlement agreements approved by an OSC panel Friday.

The lenders also agreed to an additional payment of $800,000 each to cover the costs of the OSC’s investigation. As well, internal audit groups at both banks will conduct audits of their compliance with the FX Global Code, a set of principles for the foreign exchange market.

“These are serious failings by two of the biggest, most sophisticated and well-resourced financial institutions in Canada,” said the OSC’s director of enforcement Jeff Kehoe in a statement Friday.

“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.”

The multi-million dollar settlements with Canada’s biggest securities regulator come days after both lenders reported their latest quarterly results. Last week, RBC reported that it earned third-quarter profits of $3.26 billion. On Thursday, TD reported that it earned $3.26 billion in net income during the quarter ended July 31.

In calculating the settlement amounts, OSC staff also took into account the amount of relevant revenue during the period between 2011 and 2013, which were estimated at $102.87 million for TD and $124 million for RBC.

The OSC said TD’s payment was calculated as 10 per cent of the relevant revenue plus an additional $1 million for each year of conduct, but then applied a discount of 30 per cent for its early settlement and co-operation.

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RBC’s payment was calculated with a similar methodology, but the lender received a 12 per cent discount for its co-operation.

Vingoe said Friday that both banks complied with the regulator’s probe, but noted that TD’s co-operation was “exemplary.”

The factors in the OSC’s decision to approve these settlements included efforts by both TD and RBC to improve their compliance and procedures, Vingoe said. He noted that RBC has since prohibited and shut down multi-dealer chatrooms, implemented training and implemented enhanced surveillance of electronic communication. He said TD, among other things, has engaged a third-party consultant to review its market-abuse controls.

The banks agreed as part of the settlements that their currency traders exchanged confidential information, such as the existence of stop loss orders, with traders at other financial institutions over a period between 2011 and 2013.

Both banks also agreed that they did not have a sufficient system of controls and supervision in place in relation to their foreign exchange businesses during that time.

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However, neither lender admitted to a specific breach of securities law and OSC staff did not allege or have any evidence of market manipulation, OSC staff lawyer Cullen Price said.

Still, TD and RBC “failed to meet the high standards of conduct expected of a market participant, which potentially put its customers at risk,” said OSC’s vice chair Grant Vingoe during both hearings.

TD and RBC foreign currency traders were involved in several large chatrooms involving traders from other international banks, as well as bi-lateral chats, and OSC staff had identified “many hundreds of prohibited disclosures” between 2011 and 2013, the regulator said in its summary of the agreed facts.

“Participation in chatrooms with traders from other firms had a profit motive,” the OSC wrote.

For example, the OSC cited comments in a multi-dealer chatroom by a London-based TD FX trader who said “profit is profit” and “no-one ever got fired for making cash.” To another currency trader at another large Canadian bank, the same TD trader commented “u should be over 2 bucks up on my ideas and info this year” to another trader at a large Canadian bank.

In response to the comment, “mate the only reason you’re up this year is cause of my info,” an RBC trader replied “i agree ur tips hav been hot this year” the OSC wrote, as part of its agreed facts with RBC.

Paul Le Vay, a lawyer with Stockwoods LLP representing TD Bank at the hearing, said the lender has worked “continuously” over the last six years to remediate and improve its FX compliance and supervision program. He noted TD — Canada’s second-largest bank by market value — has since established a policy specifically for its currency traders.

“The bottom line is that TD’s supervision and controls environment for FX trading is quite different today than it was six to eight years ago,” Le Vay told the hearing Friday.

Lawrence Ritchie, a lawyer with Osler, Hoskin & Harcourt LLP representing RBC, said the bank admits that its supervision and controls during that period were “insufficient” to prevent foreign currency traders from disclosing and receiving confidential information to and from traders at other banks.

“RBC acknowledges that exchanging confidential information can cause risk, including a risk in the public confidence in the capital markets,” he told the OSC hearing.

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He added that RBC, Canada’s biggest lender by market value, is “committed to ensuring a strong culture of compliance.”

“This settlement, and the steps taken with staff to reach it, reflects these commitments,” Ritchie said.

Companies in this story: (TSX:TD, TSX:RBC)

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