Deutsche Bank hit hard by Korea's financial regulators

Deutsche Bank's derivatives trading activities on November 11 have been condemned as market manipulation by Korea's FSC and criminal prosecution could follow.

The final week of February was a bad one for Deutsche Bank’s business and reputation in Korea. The Frankfurt-based lender was slapped with a six-month ban on trading derivatives on its own account and a record fine. The names of five employees have also been handed to prosecutors for possible criminal charges.

After a two-month investigation by the country’s financial regulators into charges of market manipulation and tardy reporting, the Financial Services Commission (FSC) decided that on November 11 last year, employees at Deutsche Bank’s Hong Kong and New York offices conspired with Deutsche Securities Korea (DSK), Deutsche Bank’s Korean securities unit, to manipulate market prices in the Korean capital markets.

On February 23, the FSC said that Deutsche had put together speculative derivatives positions through a combination of short synthetic futures and long put options ahead of selling W2.44 trillion ($2.2 billion) worth of Kospi 200 stocks it had accumulated earlier in 2010. The shares were sold during the last 10 minutes of trading on November 11, which was an expiry date for Kospi 200 options.

Due to what the FSC called “these massive manipulative orders”, the index dropped 2.79%, and Deutsche pocketed “illegal profits” of W44.87 billion ($40.5 million).

Deutsche was given the heaviest penalty ever imposed on a securities firm in Korea -- a ban on trading shares and derivatives for its own account. Two days later, the Korea Exchange fined DSK a record W1 billion for breaching rules on the disclosure of computer-driven trades by filing a report one minute late, causing confusion among investors.

Deutsche wasn’t happy. In a statement following the verdict and sanctions, it said that it “is disappointed by the recommendations of the Financial Services Commission in relation to allegations of market manipulation”. Meanwhile, “Deutsche Securities Korea (DSK) regrets the sanctions imposed by the FSC and the referrals of DSK and employees are very regrettable”.

The statement contained no regret for its actions, no recognition that it was at fault, and no apology. Instead, despite insisting that “ultimately, we have full confidence in the Korean financial, regulatory and judicial systems”, the inference was that Deutsche behaved legitimately, and that the Korean regulators got it wrong.

Why would that be? Maybe Deutsche thinks the regulators didn’t understand the nature of the transactions, or that perhaps they were courting populist sentiment and reflecting government anger because the market slump occurred at an embarrassing moment, when President Lee Myung-bak was addressing the G20 summit in Seoul.

It is understood that Deutsche argued that due diligence was completed and that it indicated that the sales would not have a significant market impact, that they were limit rather than market orders, and that the put options were bought independently because they were cheap. 

Nevertheless, it seems international banks still struggle to accept that some behaviour is unacceptable. Hubris and an almost sociopathic culture continue to prevail. Sophistry, legal nit-picking and obfuscating geek-speak can be used to justify all sorts of activities, particularly in the arcane – and highly creative – financial world. But, surely the lessons learned since 2008 include the understanding that the real world and its opinions matter too.

When Citigroup was hauled over by the UK and German regulators for huge, destabilising trades in the eurozone bond markets back in August 2004, the US bank’s then chief executive Charles Prince had the good sense and grace to regret the trades and to describe them as “knuckle-headed”.

The first week of March would be a good one if Josef Ackermann, Deutsche’s boss, were to extend the same courtesy and PR savvy towards an Asian market and its regulators.

¬ Haymarket Media Limited. All rights reserved.
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