Deutsche Bank AG has signed a consent order with the New York State Department of Financial Services and agreed to pay a fine, having broken New York's banking law by making improper efforts to co-ordinate trading activity through online chat rooms, sharing confidential customers' information in an improper way, trading aggressively to skew prices, and misleading customers.

These grave charges stem from an investigation by the regulator which showed that between 2007 and 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.

The regulator says that the bank's supervisors behaved improperly, while 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 benefiting their own particular trading positions. On some occasions, certain Deutsche Bank traders and salespeople improperly swapped customer identity and order information with competitors at other banks. With information about the prices that competitors were quoting, traders could collude to maximise 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 favour the bank, he 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 perhaps 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 mark-up 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.

The bank is to give the regulator:

• plans for internal controls and compliance;
• plans to improve its compliance risk management programme to govern its foreign exchange trading business; and
• a plan of action with respect to its compliance with applicable laws and regulations, as well as with its own internal policies and procedures.

Deutsche Bank is licensed by the NYDFS 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 the same regulator. Assets at the New York branch and trust company come to more than $220 billion in toto.