Hungary’s financial regulator said on Thursday (22 April) that it had fined Deutsche Bank London 90 million forints ($450,000) for currency deals it says caused the Hungarian forint to weaken dramatically.
The Hungarian Financial Supervisory Authority (HFSA) said in a statement that from 2007, Deutsche Bank London marketed and concluded a number of foreign exchange swap transactions linked to changes in the spot EUR/HUF, CHF/HUF and USD/HUF exchange rates with several Hungarian banking counterparties.
Swap positions created through these transactions were to become highly profitable to the bank in the case of a weakening of the spot HUF exchange rate. Deutsche Bank’s potential profit inherent in these foreign exchange-linked swap positions was unlimited, while its potential losses were capped.
The HFSA says it found that by concluding high volume spot HUF foreign exchange transactions on 15 October 2008, Deutsche Bank London caused a significant weakening of the EUR/HUF spot exchange rate. In the meantime, the bank urged its FX-linked swap counterparties to close-out the swap positions with high profits to the bank by making increased margin calls with reference to increasing counterparty risk.
The HFSA did not accept Deutsche Bank’s argument that its large volume spot HUF sales were a necessary risk management strategy, and noted that the trades had been made at a time of economic turbulence and uncertainly.
Hungary became the first European Union member to obtain an International Monetary Fund-led bailout to avert a default as investors sold the HUF and demand for its government bonds dried up in October 2008. The Hungarian National Bank was forced to hike its base rate to 11.5% in a bid to stave off attacks by currency speculators.
The bank’s transactions “took place during an especially sensitive period for the domestic money and capital markets,” the regulator said.
However, the bank’s full cooperation with its investigations and the fact that it did not realise any financial gains from the deals was recognised as mitigating circumstances, the authority said.
A spokesperson for Deutsche Bank says: “Although Deutsche Bank respects the HFSA process, we strongly disagree with the HFSA’s finding. The trades on 15 October 2008 were part of a prudent and responsible counterparty risk management process.”
Deutsche Bank has 30 days to appeal the HFSA resolution.