Deutsche Bank Pays $205M DFS Fine In Foreign Exchange Trading Business Probe

by Ike Obudulu Posted on June 21st, 2018

New York City, USA: Deutsche Bank AG will pay a fine of $205 million 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 – Financial Services Superintendent Maria T. Vullo announced today.

DFS Investigation Found Deutsche Bank Traders and Salespeople Sought to Improperly Coordinate Trading to Manipulate Rates and Charge Excessive Spreads.

Deutsche Bank Employees Also Improperly Shared Confidential Customer Information, and Misled Customers to Benefit the Bank
Certain Limited Elements of the Bank’s Electronic Foreign Exchange Trading Platforms Had the Potential to Disadvantage Customers and Improperly Affect Markets.

Deutsche Bank will Submit to DFS Written Plans and Programs to Improve Senior Management Oversight, and Internal Controls, Compliance Risk Management and Internal Audit Functions.

The violations announced today stem from an investigation by DFS determining that from 2007 to 2013, when Deutsche Bank was the largest foreign exchange dealer in the world, the Bank repeatedly engaged in improper, unsafe, and unsound conduct in its foreign exchange business due to its failures to implement effective controls. In addition, for certain time periods, limited elements of Deutsche Bank’s electronic trading platforms had the potential to improperly disadvantage customers and improperly affect markets, when certain applications did not perform as intended.

“Due to Deutsche Bank’s lax oversight in its foreign exchange business, including in some instances, supervisors engaging in improper activity, certain traders and salespeople repeatedly abused the trust of their customers and violated New York State law over the course of many years,” said Superintendent Vullo. “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, and possible violations of federal and state criminal and civil laws and regulations, including the New York Banking and Financial Services Laws. DFS appreciates the Bank’s full cooperation with our investigation, including its own extensive internal investigation, and for taking several proactive steps to address prior to the Department’s enforcement action.”

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.

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.”

This technique 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”).  Certain Deutsche Bank traders boosted the potential impact of this strategy by using multi-bank chats to share sensitive and confidential client information. This allowed them to learn, for example, whether other traders had large positions in the opposite direction, so that they could attempt to coordinate trading strategies and achieve maximum influence on the published fix rate. The DFS investigation found that it appeared to be understood by other Deutsche Bank traders that the New York foreign exchange spot desk welcomed fix business, in part because of profits generated through manipulation. Deutsche Bank foreign exchange staff were also willing to assist customers who also sought to manipulate fix business.

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. In addition, on a number of occasions, certain Deutsche Bank traders and salespeople improperly swapped customer identity and order information with competitors at other banks.  With information about the prices competitors were quoting, traders could collude to maximize their profits at customers’ expense.

Deutsche Bank sales staff also engaged in other improper conduct designed to benefit the bank by shortchanging customers.  One such practice was “deliberate underfills” in which a trader fully fills a market order for a customer but holds back some of the order while monitoring further price movements.  If subsequent price movements favor the bank, the salesperson then “splits” the order, such that the bank reports to the customer that the order was only partly filled, and the bank keeps part of the trade for the bank’s own account without the customer’s knowledge or consent.  The bank subsequently fills the remaining part of the customer’s order, but potentially at a price less favorable to the customer.

The DFS investigation also found that Deutsche Bank sales staff employed 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.

Under the consent order announced today, Deutsche Bank will take remedial actions to prevent the conduct from recurring and will submit plans to DFS to improve senior management oversight of the company’s compliance with New York State laws and regulations relating to the company’s foreign exchange trading business.  The bank will also submit to DFS:

  • An enhanced written internal controls and compliance program;
  • A written plan to improve its compliance risk management program with regard to compliance by the bank with New York and federal laws and regulations with respect to its foreign exchange trading business; 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.

Deutsche Bank is licensed by DFS to operate a foreign bank branch in New York State, the Deutsche Bank AG New York branch. It also operates a trust company, Deutsche Bank Trust Company of the Americas, which is licensed and supervised by DFS. Assets at the New York branch and trust company total more than $220 billion combined.

Author

Ike Obudulu

Ike Obudulu

Versatile Certified Fraud Examiner, Chartered Accountant, Certified Internal Auditor with an MBA in Finance And Investments who has both worked for and consulted with some of the world's largest companies on main street and wall street in over 20 countries, Ike brings his extensive reporting and investigations experience to bear on his role as Chief Editor.
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