FINRA Fines Deutsche Bank Securities, Inc. $275,000 for Supervisory Failures Related to Swap Trades Involving US Equities

Deutsche Bank Securities Inc. (CRD #2525, New York, New York) submitted a Letter of Acceptance, Waiver and Consent in which the firm was censured and fined $275,000. See FINRA Case #2008015717201.

Without admitting or denying the findings, Deutsche Bank consented to the described sanctions and to the entry of findings that it failed to establish and enforce adequate written supervisory procedures (“WSPs”) regarding dividend-related yield enhancement on total return swap transactions that involved U.S. equities. FINRA found that Deutsche Bank failed to maintain any written procedures for how to supervise or document decisions that impacted dividend uplift on swap trades referencing U.S. dividend-paying securities. Instead, Deutsche Bank issued a memorandum regarding the Total Return Swap program. Deutsche Bank, however, failed to make any effort to establish written procedures for members of the swaps desk who were in a position to implement the guidance provided in the memo. In addition, Deutsche Bank failed to identify who was responsible for enforcing firm policies in this area, or provide an adequate process for enforcing and documenting supervision of these policies.

FINRA also found that while Deutsche Bank issued additional guidance regarding the Total Return Swap program, Deutsche Bank failed to establish adequate procedures describing how its staff would or should monitor cross-trades, market-on-close (MOC) pricing or customer trading patterns, or how staff should assess and document customers’ requests for exceptions to the guidelines. In addition, Deutsche Bank’s memo and guidelines permitted certain Total Return Swap transactions that were exceptions to the aforementioned guidance under particular circumstances. Deutsche Bank failed to keep adequate records of decisions to allow exceptions, and after-the-fact reviews of such decisions were inadequately documented.

Further, FINRA found that Deutsche Bank developed a document so that overall client trading patterns could be monitored and potential red flags regarding the use of Total Return Swaps could be identified by desk personnel. Deutsche Bank’s review of the document, however, was insufficient, because the document was based on data that failed to facilitate adequate monitoring. Deutsche Bank knew that it needed to improve its recordkeeping regarding swaps so it could better manage risks associated with yield enhancement on Total Return Swaps; however, Deutsche Bank failed to ensure that there were systems in place to retrieve sufficient data from managers’ review of executions the desk staff made. Moreover, Deutsche Bank’s records regarding MOC pricing or cross trades were inadequate, such that it made it difficult for the firm to supervise desk staff’s compliance with the guidelines regarding such pricing.

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