CFTC fines Russian banking giant VTB $5 million for fictitious FX trades

The U.S. Commodity Futures Trading Commission (CFTC) today issued an order filing and simultaneously settling charges against units of St. Petersburg, Russia based banking giant VTB – JSC VTB Bank (VTB) and VTB Capital PLC – for 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.

LeapRate readers will recall that VTB’s Russia-based retail forex arm VTB 24 Forex recently became just the fourth recipient of a Russian Forex license. A number of leading retail forex brokers in the country have either been rejected or just not yet approved, as required by Russia’s new Forex law which came into effect at the beginning of this year.

The CFTC’s order requires VTB and VTB Capital to jointly and severally pay a $5 million civil monetary penalty as a result of their unlawful conduct.

The order also requires VTB and VTB Capital to comply with certain undertakings, including instituting, updating, and/or strengthening policies and procedures designed to detect, deter, discipline, and correct any potential fictitious or noncompetitive trading on U.S. markets in violation of the Commodity Exchange Act (CEA) and a CFTC Regulation, as charged, and to conduct training addressing the ethics, compliance, and legal requirements with regard to fictitious or noncompetitive trading under the CEA and CFTC Regulations, as charged. Finally, the order requires VTB and VTB Capital to cease and desist from further violations of the CEA and a CFTC Regulation, as charged.

The Order finds that between December 2010 and June 2013, VTB and VTB Capital executed on the CME over 100 block trades in RUB/USD futures contracts, with a notional value of approximately $36 billion. Furthermore, according to the Order, due to significant capital requirements imposed on over-the-counter (OTC) swap counterparties in transactions with Russian-domiciled VTB, VTB was unable to favorably hedge its Ruble and U.S. Dollar cross-currency risk. These block trades were executed to transfer VTB’s cross-currency risk to its subsidiary, VTB Capital, at prices more favorable than VTB could have obtained from third-parties. 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 fictitious sales, which caused prices to be reported or recorded by the CME that were not true and bona fide prices, in violation of the CEA. Furthermore, according to the Order, the block trade prices did not take into account the circumstances of the markets and the parties to the block trades and thus failed to comply with CME requirements; as a result, the trades were noncompetitive in violation of a CFTC Regulation.

In settling this matter, the CFTC has taken into account VTB and VTB Capital’s cooperation during the CFTC’s investigation of this matter.

The CFTC acknowledges the assistance of the U.K. Financial Conduct Authority.

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