Okay one more from the recent CFTC trilogy: what is up with RBC? Is it the strangest of them all? I’m pretty sure I haven’t earned the right to have an opinion on that, or even a theory, but I have some questions.
One is: what was the scam here? I mean, here was the scam:
(1) RBC buys or owns stocks whose dividends are deductible for Canadian tax purposes,
(2) RBC hedges those stocks by selling single stock futures or narrow-based index futures to other bits of itself,
(3) So RBC is flat, gets the div one way and pays it the other, but gets a tax benefit from the div it gets and also presumably a deduction on the div it pays, so its net position is zero + tax benefit,
(4) EXCEPT that the bit of it that owns the stock and is short the future is flat but the bit of it that bought the future is, of course, long, so summing over all of its bits RBC is still long the stock, which is a part of this that confuses me, though not the only one,*
(5) anyway though the trades were arranged between bits of RBC rather than competitively bid,
(6) but then they memorialized them by printing them to the OneChicago exchange overseen by the CME and the CFTC,
(7) which created misleading prints because they were non-competitively-priced wash sales instead of real market trades between arms’-length counterparties,
(8) so the CFTC sued.
So, sure, I’ll go along … that sounds sort of scammy. But one thing that is weird is that OneChicago as far as I can tell is just a market for memorializing your privately negotiated trades. RBC was trading narrow-based index futures on OneChicago. Here is what OneChicago has to say about those: Read more »