The New York Department of Financial Services (DFS) has fined Deutsche Bank $205 million as part of a consent order for violations of New York banking law.
As investigation by DFS determined that from 2007 to 2013 Deutsche Bank repeatedly “engaged in improper, unsafe, and unsound conduct in its foreign exchange business due to its failures to implement effective controls”.
In addition, the DFS says that for certain time periods parts of Deutsche Bank’s electronic trading platforms had the potential to improperly disadvantage customers and improperly effect markets.
“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,” says DFS Superintendent, Maria Vullo.
She continues: “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 FX 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, the DFS alleges that 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.”
Certain Deutsche Bank traders supposedly 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 FX staff were also willing to assist customers who also sought to manipulate fix business.
The 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 maximise their profits at customers’ expense.
Deutsche Bank sales staff also apparently engaged in other improper conduct designed to benefit the bank by short-changing 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.
Another tactic that the DFS says that Deutsche Bank sales staff improperly employed was to secretly increase the “markup” charged to customers for trade execution. In a number of instances, the bank’s 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.
As part of the consent order Deutsche Bank will be required to produced 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.