Deutsche Bank Pegged With $55 Million Fine by SEC
The SEC says Deutsche inflated the value of a portfolio of derivatives by $1.5-$3.3 bn.
As a result, the bank has settled with the SEC on a $55 million fine.
The SEC's investigation found that Deutsche Bank inflated the value of a portfolio of leveraged derivatives during crisis by an estimated $1.5-$3.3 billion during that time period.
"At the height of the financial crisis, Deutsche Bank's financial statements did not reflect the significant risk in these large, complex illiquid positions," said Andrew Ceresney, director of the SEC's Division of Enforcement, in a statement. "Deutsche Bank failed to make reasonable judgments when valuing its positions and lacked robust internal controls over financial reporting."
For the exact breakdown of where Deutsche Bank erred, here is the meat of the SEC press release:
An SEC investigation found that Deutsche Bank overvalued a portfolio of derivatives consisting of "Leveraged Super Senior" (LSS) trades through which the bank purchased protection against credit default losses. Because the trades were leveraged, the collateral posted for these positions by the sellers was only a fraction (approximately 9 percent) of the $98 billion total in purchased protection. This leverage created a "gap risk" that the market value of Deutsche Bank's protection could at some point exceed the available collateral, and the sellers could decide to unwind the trade rather than post additional collateral in that scenario. Therefore, Deutsche Bank was protected only up to the collateral level and not for the full market value of its credit protection. Deutsche Bank initially took the gap risk into account in its financial statements by adjusting down the value of the LSS positions.
According to the SEC's order instituting a settled administrative proceeding, when the credit markets started to deteriorate in 2008, Deutsche Bank steadily altered its methodologies for measuring the gap risk. Each change in methodology reduced the value assigned to the gap risk until Deutsche Bank eventually stopped adjusting for gap risk altogether. For financial reporting purposes, Deutsche Bank essentially measured its gap risk at $0 and improperly valued its LSS positions as though the market value of its protection was fully collateralized. According to internal calculations not for the purpose of financial reporting, Deutsche Bank estimated that it was exposed to a gap risk ranging from $1.5 billion to $3.3 billion during that time period.
Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.
To access these options, along with all other subscription benefits, please contact info@waterstechnology.com or view our subscription options here: http://subscriptions.waterstechnology.com/subscribe
You are currently unable to print this content. Please contact info@waterstechnology.com to find out more.
You are currently unable to copy this content. Please contact info@waterstechnology.com to find out more.
Copyright Infopro Digital Limited. All rights reserved.
As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (point 2.4), printing is limited to a single copy.
If you would like to purchase additional rights please email info@waterstechnology.com
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (clause 2.4), an Authorised User may only make one copy of the materials for their own personal use. You must also comply with the restrictions in clause 2.5.
If you would like to purchase additional rights please email info@waterstechnology.com
More on Regulation
Preparing for the gathering storm
The Markets in Crypto-Assets (Mica) regulation came into force across the European Union on June 29 to enhance the transparency and integrity of the industry’s burgeoning crypto markets. Travis Schwab, CEO of Eventus, discusses his firm’s Mica strategy…
American Bankers Assoc. asks SEC: Do you know what you’re doing?
The industry group disagrees severely with regulators’ interpretation of the Financial Data Transparency Act, hinting at possible legal action in a recently published comment letter.
DORA will change the buy vs. build debate… maybe
Waters Wrap: With DORA’s deadline looming, trading firms are having to reassess their long-term tech strategies. Anthony wonders if that means more building and less buying.
The SEC needs a hand with artificial intelligence
The SEC wants to take a tough stance on AI, but it has a talent problem… or a marketing problem. Or both…
Off-channel messaging (and regulators) still a massive headache for banks
Waters Wrap: Anthony wonders why US regulators are waging a war using fines, while European regulators have chosen a less draconian path.
Banks fret over vendor contracts as Dora deadline looms
Thousands of vendor contracts will need repapering to comply with EU’s new digital resilience rules
Chevron’s absence leaves questions for elusive AI regulation in US
The US Supreme Court’s decision to overturn the Chevron deference presents unique considerations for potential AI rules.
Aussie asset managers struggle to meet ‘bank-like’ collateral, margin obligations
New margin and collateral requirements imposed by UMR and its regulator, Apra, are forcing buy-side firms to find tools to help.