The U.S. Commodity Futures Trading Commission (CFTC) has issued a significant penalty against JSC VTB Bank, a major Russian financial institution, and its subsidiary VTB Capital PLC, for engaging in unlawful trading practices involving Russian Ruble/U.S. Dollar (RUB/USD) futures contracts. According to a CFTC order released on September 19, 2016, both entities are jointly liable for a $5 million civil monetary penalty due to their execution of fictitious and noncompetitive block trades. These trades were conducted on the Chicago Mercantile Exchange (CME), a leading U.S. futures exchange.
VTB Capital PLC, while incorporated in the U.K., is overwhelmingly owned by VTB Bank, highlighting the close relationship and shared responsibility in this case. The CFTC’s investigation revealed that between December 2010 and June 2013, VTB and VTB Capital orchestrated over 100 block trades in RUB/USD futures, totaling a notional value of approximately $36 billion.
Understanding the Illegal Trading Scheme
The core of the violation lies in the nature of these block trades. The CFTC found that VTB, facing substantial capital requirements for over-the-counter (OTC) swaps with Russian entities, sought a way to manage its Ruble and U.S. Dollar cross-currency risk more favorably. Instead of engaging in standard market transactions, VTB utilized CME-cleared RUB/USD futures contracts to transfer this risk to its subsidiary, VTB Capital. This transfer occurred at prices that were advantageous to VTB, more so than what could have been achieved through open market transactions with independent third parties.
Subsequently, VTB Capital would hedge this acquired cross-currency risk through OTC swaps with various international banks. This arrangement effectively allowed VTB and VTB Capital to circumvent market norms and regulations by using risk-free, non-arms-length transactions in the futures market to achieve what VTB could not directly accomplish in the swaps market due to regulatory constraints.
Fictitious and Noncompetitive Trading: A Breach of Regulations
The CFTC Order clearly states that these block trades were deemed fictitious sales. This conclusion stems from the fact that the prices reported and recorded by the CME as a result of these trades did not reflect genuine, bona fide market prices. Such practices directly violate the Commodity Exchange Act (CEA), which aims to ensure market integrity and prevent manipulation.
Furthermore, the CFTC determined that the prices used in these block trades failed to consider prevailing market conditions and the intrinsic relationship between VTB and VTB Capital. Consequently, the trades were deemed noncompetitive, contravening CFTC Regulation and CME rules designed to maintain fair and transparent trading environments.
Penalties and Remedial Actions
Beyond the $5 million penalty, the CFTC Order mandates VTB and VTB Capital to undertake significant remedial actions. These include a commitment to institute, update, and enhance their internal policies and procedures. The goal is to establish robust systems capable of detecting, deterring, and correcting any potential future instances of fictitious or noncompetitive trading within U.S. markets. These measures must be designed to ensure compliance with the CEA and relevant CFTC Regulations.
Moreover, VTB and VTB Capital are required to conduct comprehensive training programs for their staff. These programs must emphasize ethical conduct, compliance protocols, and the legal obligations pertaining to trading activities under the CEA and CFTC Regulations, specifically addressing the prohibitions against fictitious and noncompetitive trading. Finally, the Order includes a cease and desist provision, legally binding VTB and VTB Capital from any further violations of the CEA and CFTC Regulations as outlined in the charges.
The CFTC acknowledged the cooperation of VTB and VTB Capital during the investigation, which was considered in determining the settlement terms. The CFTC also expressed gratitude to the U.K. Financial Conduct Authority for their assistance in this matter.
This case underscores the CFTC’s commitment to upholding the integrity of U.S. financial markets and ensuring fair trading practices, particularly in the complex realm of international finance and currency exchange involving Russian Money To Us Dollars. The penalties and required undertakings serve as a strong deterrent against similar misconduct and reinforce the importance of compliance with regulatory standards in all trading activities.
