Deutsche Bank AG was given the
heaviest penalty ever levied on any securities firm in South Korea for
triggering a Nov. 11 stock market rout that erased $26 billion of
value.
Deutsche Bank will be banned from trading shares and derivatives
for its own account in the country for six months, the Financial
Services Commission said yesterday. The regulator will ask
prosecutors to investigate five employees at the Frankfurt-based
firm.
The slump in the benchmark Kospi index during the last minutes of
trading on Nov. 11 prompted regulators to limit the number of
equity derivative contracts investors can hold. The penalty against
the local unit comes amid heightened scrutiny globally of
equity-market swings since a 20-minute drop in U.S. equities on May
6 briefly erased $862 billion of market value.
“Regardless of how much money Deutsche Bank might lose from the
business suspension, the damage to its reputation is humiliating,”
said Namgil Nam, a research fellow and head of derivatives at
Korea Capital
Market Institute in Seoul. “The severe penalty will show the market
that South Korean authorities are determined to clamp down on
irregularities.”
Deutsche Bank said it was “disappointed” by the recommendations
and will cooperate with Korean authorities, according to a
statement from the firm yesterday. Michael West, a
Hong Kong-based spokesman for the bank, declined to comment on any
revenue loss estimates from the trading restriction.
Seoul prosecutors have begun an investigation into Deutsche
Bank’s Korean operations at the request of the regulators,
television broadcaster YTN reported today, citing prosecutors.
The FSC said yesterday that it didn’t file a complaint with
prosecutors against Deutsche Securities Korea Co.’s parent company.
Still, the commission has notified Korean prosecutors and the
Federal Financial Supervisory Authority of Germany about potential misconduct by
the parent company, it said.
Deutsche Bank said it will hold an independent review of systems
and controls at its Asian Equities Absolute Strategies Group. The
regulator didn’t identify the five employees.
Regulators began investigating Deutsche Bank units in Seoul and
Hong Kong after
the Financial Supervisory
Service said about 1.6 trillion won ($1.4 billion) of
sell orders were made through the company’s Korean brokerage
unit.
Korea Exchange
Inc. said the Kospi’s tumble on Nov. 11, when options
expired, was caused by “program” selling. Deutsche Bank breached
stock exchange rules governing the disclosure of computer-driven
trades by filing a report one minute late that day, the bourse said
on Nov. 15.
The Kospi fell 0.6 percent to 1,949.88 at the 3 p.m. close in
Seoul. It has
gained 1.8 percent since the incident.
Korea Exchange will hold a meeting Feb. 25 to discuss penalties
for the local brokerage unit, Lee Cheol Jae, an executive director
at the bourse operator’s market oversight division, said by
telephone.
The five Deutsche Bank staff conspired to manipulate the market
by selling 2.44 trillion won worth of shares in the last minutes of
trading on Nov. 11, with the “purpose” of making gains from
“speculative” derivatives positions built in advance, the FSC said
yesterday. The German lender’s units made 45 billion won of
“unfair” trading profit that day, according to the regulator.
The government will take decisive steps on any violation of
rules to ensure the financial market is transparent and
trustworthy, FSC Chairman Kim Seok Dong told reporters today in
Seoul.
“I’m confident that the measures we took against Deutsche Bank
this time are acceptable anywhere,” Kim said. “No market player
should fall under the illusion that they can do anything. Once they
cross that line, we’ll make sure they pay for it.”
The six-month ban was the first business suspension handed down
to any foreign broker in Korea since the FSS was set up in 1999,
according to its data. The supervisory service is a non-
governmental body that helps the FSC and the stock exchange police
South Korean financial markets.
Under the tightened rules on South Korean derivatives holdings
announced by the Financial Services Commission on Jan. 11,
institutional investors will be allowed a maximum 10,000 futures
and options contracts in any “speculative” transaction.
While institutions are now limited to 7,500 futures contracts
and individuals can hold 5,000 futures contracts, there are no
limits on options. The nation’s bourse operator said on Jan. 31
that the new rule would start from March 7.
Deutsche Securities Korea accounted for 1.8 percent of the total
trading value of Kospi-listed shares last year, according to Koscom
Corp., which provides financial data from Korea Exchange
Inc.
The unit had 118 employees as of Dec. 31 and posted nine- month
profit of 26.9 billion won through December, according to the
company’s filing to
the FSS on Feb. 14. The brokerage earned annual profit of 32.2
billion won in the previous year.
extracted from bloomberg