Deutsche Bank Gets Six-Month Ban on Derivatives Trading in Korea

(Bloomberg) -- Deutsche Bank AG was banned from proprietary stock and derivatives trading for six months in South Korea after regulators said the lender triggered a stock market rout that erased $26 billion of market value.

The Financial Services Commission will ask prosecutors to investigate five Deutsche Bank employees, Choi Kyu Yun, standing commissioner of the regulator, told reporters in Seoul yesterday. Deutsche Bank said it was “disappointed” by the recommendations, and will cooperate with Korean authorities, according to a statement.

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.

“Penalties are quite natural if trades were made intentionally to distort markets,” said Im Jeong Jae, a fund manager in Seoul at Shinhan BNP Paribas Asset Management Co., which oversees $29 billion of assets. “As trading gets more complex, it’s almost impossible to have perfect rules and systems in place to regulate it.”

The regulator said it didn’t file a complaint with South Korean prosecutors against Deutsche Securities Korea Co.’s parent company. Still, the FSC has notified South 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.

Sell Orders

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.

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.

Deutsche Bank units allegedly made 45 billion won of “unfair” trading profit on Nov. 11, the FSC said today.

Limits on Contracts

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.

Japanese regulators have said they will ban investors from short-selling stocks with the intention of buying back the shares in public offerings to rein in price volatility.