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From Banking and Finance Law Daily, April 23, 2015

Deutsche Bank settles interest rate benchmark manipulation charges for $2.5 billion

By Lene Powell, J.D.

Deutsche Bank AG announced it will pay about $2.5 billion to settle civil and criminal charges of manipulating multiple interest rate benchmarks over a six-year period, including the London Interbank Offered Rate (LIBOR) for several currencies and the Euro Interbank Offered Rate (Euribor). The enforcement cases were brought by multiple agencies, including the CFTC, Department of Justice, New York Department of Financial Services, and the U.K. Financial Conduct Authority.

The settlement is the latest in a series of cases involving manipulation of interest rate benchmarks by major banks. Over the last three years, the CFTC and DOJ have imposed large fines for similar misconduct by UBS, Rabobank, Royal Bank of Scotland, and Barclays, as well as interdealer brokers ICAP Europe Limited and RP Martin Holdings Limited. According to DOJ Assistant Attorney General Caldwell, Deutsche Bank is the sixth major financial institution to admit to criminal benchmark manipulation, and the DOJ settlement represents the largest criminal penalty to date in the LIBOR investigation.

In a statement, Deutsche Bank co-CEOs Jürgen Fitschen and Anshu Jain said the bank accepted the findings. Deutsche Bank has disciplined or dismissed individuals involved in the misconduct, and substantially strengthened control teams, procedures and record-keeping, they said.

How LIBOR is calculated. According to the CFTC order, LIBOR is the most widely used benchmark rate in the world. It is used as a reference rate for over $500 trillion in interest rate transactions, including loans, over-the-counter derivatives contracts, and exchange-traded interest rate futures and options.

LIBOR and the other benchmark rates are determined by contributions from panel banks, including Deutsche Bank, and are supposed to reflect each bank's honest assessment of the costs of borrowing unsecured funds in the cash markets. In the process in place at the time of the conduct, the panel banks submitted their rates each day for multiple currencies and tenors, which were then averaged to arrive at a fixing for each currency and tenor of LIBOR. A similar process was used to calculate Euribor. Banks must exercise their judgment to determine the rates, and are not allowed to consider factors unrelated to the costs of borrowing unsecured funds, like a benefit to a bank's trading positions

Manipulation. Because the benchmark rates are based on panel banks’ judgment rather than observable transactions, they are susceptible to manipulation. As the various orders find, Deutsche Bank submitters routinely took into account Deutsche Bank traders' derivatives trading positions when making the bank's LIBOR and Euribor submissions, as well as their own cash and derivatives trading positions. They also aided and abetted other panel banks' attempts to manipulate Euribor and Yen LIBOR.

As the CFTC explained, there was a widespread culture of trader self-interest at Deutsche Bank, and the bank failed to maintain a proper separation between traders and submitters. Traders often shouted their requests for beneficial submissions across the trading floor to the submitters, and the bank even restructured its business lines so that traders and submitters sat together. A senior manager regularly sat with the traders and encouraged them and their counterparts in other offices to communicate trading positions, so submitters knew exactly what submissions were most favorable to the various desks' trading positions. In an obvious conflict of interest, the bank sometimes allowed traders to make the submissions themselves, which made it easy to skew the bank's submissions to benefit their traders’ positions and accommodate the requests of their fellow derivatives traders.

Lack of cooperation. The regulators pointed to a lack of cooperation by Deutsche Bank as a factor in the sanctions. The DOJ said the bank’s cooperation “fell short in some respects.” The CFTC said it began investigating certain LIBOR submissions in early 2010, but the bank did not fully cooperate until the middle of 2011. The FCA said the bank took too long to produce vital documents and moved too slowly to fix certain systems and records.

“This case shows how seriously we view a failure to cooperate with our investigations and our determination to take action against firms where we see wrongdoing,” said Georgina Philippou, acting director of enforcement and market oversight at the FCA.

CFTC settlement. The CFTC found that for more than six years, Deutsche Bank routinely engaged in acts of false reporting and attempted manipulation and, at times, succeeded in manipulating the London Interbank Offered Rate (LIBOR) for U.S. Dollar, Yen, Sterling, and Swiss Franc, and the Euro Interbank Offered Rate (Euribor). The bank lacked internal controls, procedures, and policies concerning its LIBOR and Euribor submission processes, and failed to adequately supervise its trading desks and traders. The CFTC ordered the bank to pay a civil monetary penalty of $800 million, cease and desist from its violations of the Commodity Exchange Act, and complete certain remedial undertakings.

DOJ settlement. Deutsche Bank subsidiary DB Group Services (UK) Limited agreed to plead guilty to one count of wire fraud and pay a $150 million fine. In addition, Deutsche Bank entered into a deferred prosecution agreement that requires the bank to continue cooperating with the Justice Department in its ongoing investigation, pay a $625 million penalty beyond the fine imposed upon DB Group Services (UK) Limited, and retain a corporate monitor for the three-year term of the agreement.

NY DFS settlement. Deutsche Bank must pay $600 million, terminate and ban individual employees who engaged in misconduct, and install an independent monitor for New York Banking Law.

UK FCA settlement. The FCA imposed a £227 million fine ($340 million). Deutsche Bank received a 30% discount by settling early.

Companies: Barclays; DB Group Services (UK) Limited; Deutsche Bank AG; ICAP Europe Limited; Rabobank; Royal Bank of Scotland; RP Martin Holdings Limited; UBS

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