(CN) – Deutche Bank has been fined a record $2.5 billion by regulators in the United States and Great Britain who claim it manipulated benchmarks used to set interest rates on everything from mortgages to credit cards.
The previous record fine was $1.5 billion paid to regulators by the Swiss bank UBS in 2012.
The $2.5 billion penalty levied against Deutsche Bank includes $600 million to be paid to the New York State Department of Financial Services, $800 million to the Commodities Futures Trading Commission, $775 million to the U.S. Department of Justice, and £227 million (about $340 million) to the United Kingdom’s Financial Conduct Authority.
The bank also agreed to terminate and ban individual employees who engaged in misconduct, and install an independent monitor for New York Banking Law violations in connection with the manipulation of the benchmark interest rates, including the London Interbank Offered Bank, the Euro Interbank Offered Rate and Euroyen Tokyo Interbank Offered Rate.
“Deutsche Bank employees engaged in a widespread effort to manipulate benchmark interest rates for financial gain,” said Benjamin Lawsky, New York State’s Superintendent of Financial Services, in a written statement.
“While a number of the employees involved in misconduct have already left the bank, those that remain are being terminated or banned from the New York banking system. We must remember that markets do not just manipulate themselves: It takes deliberate wrongdoing by individuals,” Lawsky said.
The London Interbank Offered Rate is a benchmark interest rate used in financial markets around the world. It is the primary benchmark for short term interest rates globally, written into standard derivative and loan documentation, used for a range of retail products, such as mortgages and student loans, and the basis for settlement of interest rate contracts on many of the world’s major futures and options exchanges. It is also used as a barometer to measure the health of the banking system and as a gauge of market expectation for future central bank interest rates.
From approximately 2005 through 2009, the government entities said, certain Deutsche Bank traders frequently requested that certain submitters submit rate contributions that would benefit the traders’ trading positions, rather than the rates that complied with the IBOR definitions.
As an example, they pointed to a February 21, 2005 exchange in which one trader requested another, “can we have a high 6mth libor today pls gezzer?”
The trader/submitter agreed.
“Sure dude, where wld you like it mate?”
The trader replied, “think it shud be 095?”
The trader/submitter replied, “cool, was going 9, so 9.5 it is.”
The trader then joked, “super – don’t get that level of flexibility when [the usual submitter] is in the chair fyg!”
Similarly, the authorities said, on December 29, 2006 a trader wrote to a submitter, “Come on 32 on 1. Mth… Cu my frd.”
The submitter agreed.
“ok will try to give you a belated Christmas present…!” he said.
The regulators said Deutsche Bank also communicated and coordinated with employees of other banks and financial institutions regarding their respective rate contributions in advance of an IBOR submission.
In short, said Aitan Goelman, director of enforcement at the U.S. Commodity Futures Trading Commission, “Deutsche Bank’s culture allowed such egregious and pervasive misconduct to thrive.”
On September 7, 2006, the governments said. a London desk head attempted to obtain a low EURIBOR submission from an external banker at Barclays, “I’m begging u, don’t forget me… pleassssssssssssssseeeeeeeeee… I’m on my knees…”
The external banker replied, “I told them 1 m up is that right?”
The London desk head continued, “please pal, insist as much as you can… my treasury is taking it to the sky… we have to counter balance it… I’m beggin u… can u beg the [a panel bank] guy as well?”
The external banker agreed.
“ok, I’m telling him,” he said.
As a bank’s IBOR rates are intended to correspond to the cost at which the bank concludes it can borrow funds, the rates are an indicator of a bank’s financial health. If a bank’s submission is high, it suggests that the bank is, or would, pay a high amount to borrow funds. This could indicate a liquidity problem and, thus, that the bank is experiencing financial difficulty.
Despite the obvious conflict of interest, regulators said, Deutsche Bank allowed at times its traders who primarily traded derivatives, such as its Yen derivatives trader, to be responsible for the Bank’s submissions, thus making it easy to skew the bank’s submissions to benefit their own positions and to accommodate the requests of their fellow derivatives traders.
These practices continued even after the British Bankers’ Association, the trade association responsible for the issuance of LIBOR, clarified in June 2008 that submissions should not be made by persons responsible for a bank’s derivatives trading book, but rather should be made by persons responsible for the management of the bank’s cash.
Deutsche Bank’s Yen derivatives trader used his dual role as trader and submitter to assist the senior yen trader at UBS in his massive scheme to manipulate Yen LIBOR over the same relevant period, the authorities said.
According to the order, the cash and derivatives trading on the desks responsible for Deutsche Bank’s misconduct increased throughout the relevant period and the desks generated significant revenues for Deutsche Bank, particularly during the global financial crisis of 2007 through 2009.
The authorities claim Deutsche Bank’s misconduct occurred even after the CFTC’s Division of Enforcement requested in April 2010, that Deutsche Bank conduct an internal investigation of its U.S. Dollar LIBOR submission practices.
Deutsche Bank did not make meaningful improvements in its internal controls until mid-2011, and did not formalize a policy about conflicts of interest among traders and submitters relating to benchmark submissions until February 2013, they said.
In related actions by the U.S. Justice Department, DB Group Services UK Limited, a subsidiary of Deutsche Bank AG, agreed to plead guilty to a criminal charge of wire fraud; Deutsche Bank AG entered into a deferred prosecution agreement whereby it would continue to cooperate with the U.S. Department of Justice in exchange for the deferral of criminal wire fraud and antitrust charges.
In a telephone press conference, Assistant U.S. Attorney General Leslie Caldwell noted: “This is the first LIBOR resolution that imposes a monitor.”
“Deutsche Bank’s manipulation of LIBOR and EuroBOR, the Euro Interbank Offered Rate, was long-term and it was pervasive,” Caldwell said.
She said that three of the 12 defendants charged have pleaded guilty, and the other charges are pending.
“We have far more work to do, and we’re doing it,” she said.
Caldwell confirmed that none of the money that Deutsche Bank must pay is tax-deductible.
Assistant Attorney General of Antitrust Bill Baer added that today’s announcement marked “one more key milestone in this investigation.”
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