Deutsche hit with US$205m fine for FX trading violations

Deutsche Bank AG has agreed to pay a fine of US$205m as part of a consent order with the New York State Department of Financial Services (DFS) for violations of New York banking law, including efforts to improperly coordinate trading activity through online chat rooms, improperly sharing confidential customer information, trading aggressively to skew prices, and misleading customers.

There are over one million structured products featuring FX rates underlyings across markets. Deutsche Bank with more than 264,000 structures linked to currency pairs marketed across jurisdictions is the most active provider of FX rates-linked products, according to SRP database. The German bank has over 86,000 live products featuring FX rates, most of which were sold in Germany/Austria, Japan (115), Switzerland (28) and Portugal (two).

'Inadequate supervision poses serious risks to the safety and soundness of an institution, and compliance failures can help facilitate violations of policies and procedures, harm to customers and other market participants,' said Financial Services Superintendent Maria Vullo (pictured).

The violations stem from an investigation by DFS determining that from 2007 to 2013, when the German bank was the largest foreign exchange dealer in the world, and claim the Deutsche Bank repeatedly engaged in improper, unsafe, and unsound conduct in its foreign exchange business due to its failures to implement effective controls.

The DFS investigation found that a number of Deutsche Bank foreign exchange traders participated in multi-party online chat rooms where participants shared confidential information, discussed coordinating trading activity, and attempted to manipulate foreign exchange currency prices or benchmark rates. By engaging in these activities, these traders sought to diminish competition and increase their profits by executing foreign exchange trades at the expense of customers or the wider market, according to the DFS.

One improper practice apparently employed by certain Deutsche Bank traders involved accumulating a large trading position and then using the position to make aggressive trades just before and during the fix window, with the intention of moving the ultimate fix price in a desired direction, up or down - known as "jamming the fix."

The DFS investigation also discovered that certain Deutsche Bank employees sought to manipulate submission-based benchmarks for certain currency pairs. The benchmarks, supposedly derived from an objective submission process, instead became potentially tainted when traders sought submissions premised on benefitting their own particular trading positions. The German bank sold at least 12 products linked to its own proprietary indices aimed at capturing long-term systematic returns available in the world's currency markets including the DB Currency Returns (USD) Index, DB Balanced Currency Harvest Index, and DB USD Currency Harvest Balanced Index, according to SRP data.

Other shortcomings involved Deutsche Bank sales staff using other tactics designed to secretly increase the 'markup' charged to customers for trade execution. In a number of instances, Deutsche Bank staff intentionally failed to correct, or even intentionally made, errors or misleading entries in trade execution records so as to keep extra profit for themselves and the bank.

Deutsche Bank agreed to take remedial actions and will submit plans to DFS to improve senior management oversight of the company's compliance with New York State laws, as well as an enhanced written internal controls and compliance program; and an enhanced written internal audit program with respect to its compliance with applicable laws and regulations, as well as its internal policies and procedures.

A copy of the consent order can be found here.

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