September 21, 2016

Russian Roulette in Futures Trading: The CFTC Cracks Down on Fictitious Trades

By Ronny Valdes

On Monday September 19th, the U.S. Commodity and Futures Trading Commission (CFTC) announced the filing and simultaneous $5 million settlement of charges against JSC VTB Bank (VTB), a Russian state-backed lender, for executing fraudulent ruble-dollar trades. VTB and its U.K subsidiary, VTB Capital PLC (VTB Capital), were accused of executing noncompetitive and fictitious block trades in ruble-dollar futures contracts through the Chicago Mercantile Exchange (CME). The crux of the scheme involved the two entities executing approximately 100 block trades with a value of $36 billion between 2010 and 2013.

VTB could have conducted these trades itself, but it faced issues hedging its ruble-dollar cross-currency risk in the swaps market due to significant capital requirements for Russian-domiciled entities in over-the-counter (OTC) swaps with third-parties. To solve this problem, VTB transferred its cross-currency risk to its U.K. subsidiary which could then hedge the risk OTC in the futures market with various international banks. This scheme allowed VTB to gain more favorable pricing than if it had dealt with third parties itself.

This type of enforcement action demonstrates a clear intent by the CFTC to crack down on fictitious non-competitive trades through U.S. commodity exchanges. The CFTC recognizes that these types of fraudulent block trades fail to obtain fair and reasonable prices based on current market conditions, thereby hampering the efforts of complying entities to obtain a fair price under the regulations. This type of action may become more commonplace as the CFTC flexes its jurisdictional muscle in reaching transactions by foreign entities in the U.S. markets and involving U.S. dollars.

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