JSC VTB Bank and VTB Capital to Pay CFTC $5m for Unlawful Execution of Trades

The US Commodity Futures Trading Commission (CFTC) today filed an order and simultaneously settled charges against Russian banking institution, JSC VTB Bank (VTB), and VTB Capital PLC (VTB Capital), for executing fictitious and non-competitive block trades in Russian ruble/US dollar.

VTB Capital, a UK incorporated bank, is 94 percent owned by a holding company that, in turn, is 100 percent owned by VTB.

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Case History

Between December 2010 and June 2013, VTB and VTB Capital executed on the CME in excess of 100 block trades in RUB/USD futures contracts, with a notional value of approximately $36 billion.

Due to significant capital requirements imposed on over-the-counter (OTC) swap counterparties in transactions with Russian-domiciled VTB, VTB was unable to favourably hedge its ruble and US dollar cross-currency risk.

These block trades were executed to transfer VTB’s cross-currency risk to its subsidiary, VTB Capital, at more favourable prices than VTB could have obtained from third parties.

VTB Capital would then hedge this cross-currency risk in OTC Swaps Swaps Swaps can be defined as a derivate contact composed of two parties that exchange to cash flow between two separate financial instruments.They are generally divided into two categories. This includes contingent claims (options) and forward claims, where forward contracts, swaps, and exchange-traded funds (ETFs) are exchanged. Commodity price, equity price, interest rate, and foreign exchange rate are common variables used as one of the cash flows in swaps upon initiation. Different Types of Swaps Swaps can be defined as a derivate contact composed of two parties that exchange to cash flow between two separate financial instruments.They are generally divided into two categories. This includes contingent claims (options) and forward claims, where forward contracts, swaps, and exchange-traded funds (ETFs) are exchanged. Commodity price, equity price, interest rate, and foreign exchange rate are common variables used as one of the cash flows in swaps upon initiation. Different Types of Swaps Read this Term 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.

The block trades were fictitious sales which caused prices to be reported or recorded by the CME that were not bone fide prices, in violation of the CEA.

In addition, 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 and in violation of a CFTC Regulation Regulation Like any other industry with a high net worth, the financial services industry is tightly regulated to help curb illicit behavior and manipulation. Each asset class has its own set of protocols put in place to combat their respective forms of abuse.In the foreign exchange space, regulation is assumed by authorities in multiple jurisdictions, though ultimately lacking a binding international order. Who are the Industry’s Leading Regulators?Regulators such as the UK’s Financial Conduct Authority ( Like any other industry with a high net worth, the financial services industry is tightly regulated to help curb illicit behavior and manipulation. Each asset class has its own set of protocols put in place to combat their respective forms of abuse.In the foreign exchange space, regulation is assumed by authorities in multiple jurisdictions, though ultimately lacking a binding international order. Who are the Industry’s Leading Regulators?Regulators such as the UK’s Financial Conduct Authority ( Read this Term.

Penalties

VTB and VTB Capital are required to jointly pay $5 million in penalties as a result of their unlawful conduct. The two entities are also required to comply with undertakings, including instituting, updating and strengthening policies and procedures designed to detect, deter, discipline, and correct any potentially fictitious or non-competitive trading on the US markets in violation of the Commodity Exchange Act (CEA).

The firms are also required to conduct training addressing the ethics, compliance, and legal requirements with regard to fictitious or non-competitive trading under the CEA and CFTC regulations.

Finally, VTB and VTB Capital are prohibited from committing any further violations of the CEA and the relevant CFTC regulation.