By Kang Seung-woo
The brokerage arm of Deutsche Bank was banned from proprietary stock and derivatives trading here for six months, Wednesday, after the nation’s financial regulator held it accountable for a market crash on Nov. 11 triggered by its massive sell orders.
The Financial Services Commission (FSC) said it decided to slap Deutsche Securities Korea with the business suspension, which will take effect from April, for market manipulation. The six-month shutdown is the highest administrative sanction.
In addition, the regulator filed charges with the prosecution against five Deutsche Bank employees ― one from the Seoul brokerage unit, one from its New York branch and three from the lender’s Hong Kong operation ― over illegal trades.
However, the FSC said that it failed to find any involvement by Deutsche Bank headquarters in the manipulation, and did not ask prosecutors to investigate the head office of the German-based banking giant.
The punitive action came after the Financial Supervisory Service (FSS), the executive body of the FSC, investigated the bank’s massive stock sell-off that triggered the benchmark KOSPI to drop 2.79 percent, wiping out $26 billion in market value, due to arbitrage trading on the spot and futures markets.
During the closing minutes of trade on the options expiry date, sell orders of 2.4 trillion won ($2.13 billion) from foreign investors were placed in search of derivative gains that could result from key index falls.
The FSC said that in the process, Deutsche Bank made an illegal gain of about 44.87 billion won from put-option transactions. After the stock plunge, it found that the bulk of orders were processed via Deutsche Bank’s brokerage unit, leading to an in-depth investigation by the FSS.
The FSS dispatched its investigators to Hong Kong, as Deutsche Bank’s unit there made some of the biggest transactions in question during the fall.
In the wake of the “option shock,” the financial regulator came up with plans last month to strengthen requirements on financial derivatives trading, which include the introduction of a cap on the maximum daily trading volume.
Meanwhile, the Korea Exchange (KRX) will hold a meeting on Friday to decide how to penalize the brokerage unit for violating stock exchange rules governing the disclosure of computer-driven trades as the branch filed a report one minute late on Nov. 11.
The main bourse can punish member firms through three options _ giving a warning, imposing a fine, or delisting. Considering the heavy damage triggered by the case, the securities arm is expected to face a record fine. Previously, the exchange imposed a fine of 250 million won on Kiwoom Securities in June 2009.
In a statement following the FSC’s measures, Deutsche Bank said that it regrets the sanctions imposed. “The subject matter of the referral is confined to very specific areas of trading activity and the majority of Deutsche Bank’s activities in Korea will continue to operate normally,” it said.