Unsound FX practices, Volcker rule violations lead to $156.6m in penalties for Deutsche Bank

Maria Nikolova

From October 2008 through October 2013, Deutsche failed to oversee and adequately control its FX traders.

Unsound practices in the Forex markets have just landed Deutsche Bank AG (ETR:DBK) with a heavy fine in the United States.

The US Federal Reserve has announced the imposition of $156.6 million in civil monetary penalties on the bank, which conducts operations in the United States through DB USA Corporation (“DBUSA”), and Deutsche Bank AG New York Branch (the “Branch”). The hefty fines are related to two enforcement actions – the first concerns the bank’s unsafe FX practices; the second – failures to comply with the Volcker rule.

The unsound FX practices have resulted in a civil monetary penalty of $136,950,000.

The bank has conducted a review of its Forex activities from October 2008 through October 2013. During the review period, Deutsche Bank lacked adequate governance, risk management, compliance, and audit policies and procedures to make sure that its FX activities complied with safe and sound banking practices and applicable internal policies.

Also, FX traders in the spot market at Deutsche Bank communicated with FX traders at other financial institutions through chatrooms on electronic messaging platforms accessible by traders at numerous institutions. Deutsche’s deficient policies and procedures prevented from detecting and addressing the unsound conduct by certain of its FX traders, including in communications by traders in multibank chatrooms. These communications included (inter alia) disclosures of trading positions and even discussions of coordinated trading strategies with traders of other institutions, as well as discussions about possible FX benchmark fix-related trading with traders of other institutions.

As a result of these deficient policies and procedures, Deutsche Bank engaged in unsafe and unsound banking practices.

In addition to the fine, within 90 days of the order, the Management Board of the Bank or an authorized committee thereof has to submit a written plan acceptable to the Reserve Bank to improve senior management’s oversight of Deutsche Bank’s compliance. Also, within 90 days of the order, the Bank, DBUSA, and the Branch must submit an enhanced written internal controls and compliance program acceptable to the Reserve Bank to comply with applicable U.S. laws and regulations with respect to Deutsche Bank’s Designated Market Activities. Within 90 days of this order, the Bank, DBUSA, and the Branch shall submit a written plan to improve its compliance risk management program with regard to compliance by Deutsche Bank with applicable U.S. laws and regulations with respect to Designated Market Activities firm-wide.

On an annual basis, DBUSA and the Branch must conduct a review of compliance policies and procedures applicable to Deutsche Bank’s Designated Market Activities and their implementation, and an appropriate risk-focused sampling of other key controls for Deutsche Bank’s Designated Market Activities.

The monetary penalty with regards to non-compliance with the Volcker rule amounts to $19.71 million.

On March 30, 2016, Deutsche Bank’s Co-CEO executed and delivered to the Federal Reserve Bank of New York and the Board of Governors a Volcker Rule CEO attestation, which identified weaknesses in the bank’s Volcker Rule compliance program. There were significant gaps across certain aspects of Deutsche Bank’s Volcker Rule compliance program, including policies and procedures, management framework, and internal controls.

There were also weaknesses in Deutsche Bank’s demonstrable analyses showing that its proprietary trading is not to exceed the reasonably expected near term demands of clients, customers, or counterparties, required for permitted market-making activities, and Deutsche Bank did not subject trading desks’ RENT-D methodologies to sufficient review by internal control groups. Other set of weaknesses concerned Deutsche Bank’s metrics reporting and monitoring process which, in turn, limited the Bank’s ability to adequately monitor trading activity to detect impermissible proprietary trades.

Within 60 days of the order, the Deutsche Bank Management Board or an authorized committee thereof has to submit a written plan to improve senior management’s oversight of the firm’s compliance with Volcker Rule requirements. Also, within 60 days of this Order, the firm must submit an enhanced written internal controls and compliance risk management program.

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