CFTC ANNOUNCES DEUTSCHE BANK AG ORDERED TO PAY $2.5 MILLION PENALTY IN CASE INVOLVING SWAPS REPORTING VIOLATIONS AND SUPERVISION FAILURES

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION 

September 30, 2015

CFTC Orders Deutsche Bank AG to Pay a $2.5 Million Civil Monetary Penalty for Swaps Reporting Violations and Related Supervision Failures

CFTC Finds that Deutsche Bank Did Not Diligently Address and Correct Errors until after Bank Was Notified of CFTC Investigation

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today issued an Order filing and simultaneously settling charges against Deutsche Bank AG, a global banking and financial services company and provisionally registered Swap Dealer, for failing to properly report its swaps transactions from in or about January 2013 until July 2015 (the Relevant Period). The CFTC Order also finds that Deutsche Bank did not diligently address and correct the reporting errors until the Bank was notified of the CFTC’s investigation, and failed to have an adequate swaps supervisory system governing its swaps reporting requirements.

This is the CFTC's first action enforcing the new Dodd-Frank requirements that provide for the real-time public reporting of swap transactions and the reporting of swap data to swap data repositories.

The Order requires Deutsche Bank to pay a $2.5 million civil monetary penalty and comply with undertakings to improve its internal controls to ensure the accuracy and integrity of its swaps reporting.

CFTC Director of Enforcement Aitan Goelman commented: “This is another in a series of cases the CFTC has brought this year highlighting the importance of complete and accurate reporting – here involving reporting of swap transactions. When reporting parties fail to meet their reporting obligations, the CFTC cannot carry out its vital mission of protecting market participants and promoting market integrity.”

As a provisionally registered Swap Dealer, Deutsche Bank is required to comply with certain disclosure, recordkeeping, and reporting requirements related to its swap transactions. Specifically, Parts 43 and 45 of the CFTC’s Regulations specify requirements for real-time public reporting, public availability of swap transaction and pricing data, and reporting of creation and continuation data. These Regulations also include requirements for a reporting counterparty to report and correct errors and omissions in its swaps reporting, including cancellations, to the registered Swap Data Repository (SDR) to which the reporting counterparty originally reported the swap.

The reporting requirements are designed to enhance transparency, promote standardization, and reduce systemic risk in swaps trading. Accurate swap data is essential to effective fulfillment of the regulatory functions of the CFTC, including meaningful surveillance and enforcement programs. Moreover, real-time public dissemination of swap transaction and pricing data supports the fairness and efficiency of markets and increases transparency, which in turn improves price discovery and decreases risk.

According to the CFTC Order, during the Relevant Period, Deutsche Bank failed to properly report cancellations of swap transactions in all asset classes, which in the aggregate included between tens of thousands and hundreds of thousands of reporting violations and errors and omissions in its swap reporting. Deutsche Bank was aware of problems relating to its cancellation messages since its reporting obligations began on December 31, 2012, but failed to provide timely notice to its SDR and did not diligently investigate, address and remediate the problems until it was notified of the Division of Enforcement’s investigation in June 2014. Because of Deutsche Bank’s reporting failures, misinformation was disseminated to the market through the real time public tape and to the CFTC.

The Order further finds that Deutsche Bank’s reporting failures resulted in part due to deficiencies with its swaps supervisory system. Deutsche Bank did not have an adequate system to supervise all activities related to compliance with the swaps reporting requirements until at least sometime between April and July of 2014 – well after its reporting obligations went into effect, according to the Order.

The Order recognizes Deutsche Bank’s significant cooperation with the CFTC during the investigation of this matter.

The CFTC’s Data and Reporting Branch in the Division of Market Oversight (DMO) is responsible for the supervision of swaps data collection and reporting obligations of registered entities. This matter originated from referrals by DMO, and the Data and Reporting Branch provided substantial assistance to the Division of Enforcement during the investigation.

The CFTC Division of Enforcement staff members responsible for this matter are Allison Passman, Joseph Patrick, Robert Howell, Scott Williamson, and Rosemary Hollinger, with assistance from DMO staff Lawrence Grannan, Athanasia Papadopoulos, Kristin Liegel, Benjamin DeMaria, and Daniel Bucsa.

MORGAN STANLEY TO PAY $300,000 FINE FOR VIOLATING CUSTOMER PROTECTION RULE AND RELATED SUPERVISION FAILURES

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

August 6, 2015

CFTC Orders Morgan Stanley & Co. LLC to Pay a $300,000 Civil Monetary Penalty for Violations of Customer Protection Rule for Cleared Swaps and Related Supervision Failures

Order Finds that the Firm Failed to Maintain Sufficient U.S. Dollars in Segregated Accounts in the United States, Holding Required Funds Instead in Other Currencies

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today issued an Order requiring Morgan Stanley & Co. LLC (Morgan Stanley), a registered Futures Commission Merchant and provisionally registered swap dealer, to pay a $300,000 civil monetary penalty for failing to hold sufficient U.S. Dollars in segregated accounts in the United States to meet all of its U.S. Dollar obligations to cleared swaps customers. The Order also finds that the firm failed to implement adequate procedures and requires Morgan Stanley to cease and desist from violating CFTC Regulations, as charged.

Aitan Goelman, the CFTC’s Director of Enforcement, commented: “Since passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the CFTC has implemented rules to protect swaps customers and market participants, including rules for protection of cleared swaps customer collateral. This action demonstrates that the Division of Enforcement will investigate and pursue violations of these important rules of the road in the swaps market.”

As set forth in the Order, on numerous days from March 12, 2013 to March 7, 2014, Morgan Stanley failed to hold sufficient U.S. Dollars in segregated accounts in the United States to meet all U.S. Dollar obligations to the firm’s cleared swaps customers, in violation of CFTC Regulation 22.9. On those days, Morgan Stanley held the amount of the U.S. Dollar deficits in Euros and other currencies, rather than in U.S. Dollars, according to the Order. Because Morgan Stanley held the amount of the U.S. Dollar deficits in other currencies, it did not have a shortfall in overall cleared swaps customer collateral. As the Order finds, however, the size of Morgan Stanley’s U.S. Dollar deficits ranged from approximately $5 million to approximately $265 million, at times representing more than 10 percent of the amount that the firm was obligated to maintain in U.S. Dollars for cleared swaps customers.

Additionally, the Order finds that from November 8, 2012 to on or about April 8, 2014, Morgan Stanley did not have in place adequate procedures to comply with the currency denomination requirements for cleared swaps customer collateral and did not train and supervise its personnel to ensure compliance with CFTC Regulation 22.9. Morgan Stanley thereby failed to supervise diligently its officers, employees, and agents and did not have sufficient procedures in place to detect and deter the violations found herein, in violation of Regulation 166.3, the Order finds.

The Order recognizes that Morgan Stanley promptly reported the deficiencies to the CFTC, implemented corrective procedures, and cooperated with the CFTC’s Division of Enforcement in its investigation.

The CFTC appreciates the assistance of the Division of Swap Dealer and Intermediary Oversight.

The CFTC Division of Enforcement staff members responsible for this case are Elizabeth C. Brennan, Douglas K. Yatter, Lenel Hickson, Jr., and Manal M. Sultan.

CFTC ORDERS DEUTSCHE BANK TO PAY $3 MILION TO SETTLE VIOLATION CHARGES

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION 

December 22, 2014

CFTC Orders Deutsche Bank Securities Inc. to Pay $3 Million to Settle Charges of Improper Investment of Customer Segregated Funds, Reporting and Recordkeeping Violations, and Supervision Failures

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today issued an order filing and simultaneously settling charges against Deutsche Bank Securities Inc. (DBSI), a registered Futures Commission Merchant (FCM) based in New York, N.Y., for failing to properly invest customer segregated funds, failing to prepare and file accurate financial reports, failing to maintain required books and records, and for related supervisory failures. None of the violations resulted in any customer losses, according to the CFTC’s Order. The Order requires DBSI to pay a $3 million civil monetary penalty and to cease and desist from violating the CFTC Regulations, as charged. DBSI is an indirect, wholly-owned subsidiary of the parent company, Deutsche Bank AG.

Specifically, the CFTC’s Order finds that, for the period June 18, 2012 through August 15, 2012, DBSI failed to accurately compute the amount of customer funds on deposit. As a result of these miscalculations, DBSI’s investment of customer funds in certain money market mutual funds during that period exceeded the 50% asset-based concentration limit for such investments in violation of CFTC Regulation 1.25(b)(3)(i)(F).

The Order also finds that on at least six occasions between June 2011 and March 2013, DBSI failed to file accurate financial statements with the CFTC in a timely manner in violation of CFTC Regulation 1.10. According to the Order, DBSI did not have automated processes in place designed to ensure the accuracy of the firm’s financial reporting. Consequently, DBSI filed six amended FOCUS Reports as a result of the errors, the Order finds. The CFTC Order further finds that DBSI failed to create and maintain complete and systematic records, such as order tickets, for a number of block trades it executed at various times throughout October 1, 2009 and March 16, 2012 in violation of CFTC Regulation 1.35.

The CFTC Order finds that each of these violations was a result of DBSI’s failure to maintain adequate controls and systems, reflecting a lack of supervision over its business as a CFTC registrant in violation of CFTC Regulation 166.3.

CFTC Director of the Division of Enforcement, Aitan Goelman, said, “This case demonstrates that the Commission takes the sufficiency of its registrants’ internal controls very seriously, and expects that these internal controls will both address known issues and identify regulatory risks to minimize the possibility of violations like this.”

The Order recognizes DBSI’s cooperation and corrective action it undertook after its deficiencies were discovered.

The CFTC’s Enforcement Division thanks Jerry Nudge, Kevin Piccoli, Mortimer Rollins and Robert Laverty of the CFTC’s Division of Swap Dealer and Intermediary Oversight for their assistance in this matter.

CFTC Division of Enforcement staff members responsible for this matter are Susan Gradman, Brigitte Weyls, Lindsay Evans, Joseph Patrick, Scott Williamson, Rosemary Hollinger, and Richard Wagner.

MERRILL LYNCH TO PAY CFTC FINE FOR SUPERVISORY FAILURES

FROM:  COMMODITY FUTURES TRADING COMMISSION 

CFTC Orders Merrill Lynch to Pay $1.2 Million Fine for Supervision Failures

Firm’s Supervisory Failures over Fee Processing Led to Client Overcharges at Times

Washington, DC — The U.S. Commodity Futures Trading Commission (CFTC) today issued an Order filing and simultaneously settling charges against Merrill Lynch, Pierce, Fenner & Smith Incorporated (Merrill Lynch) for failing to diligently supervise its officers’, employees’, and agents’ processing of futures exchange and clearing fees charged to its customers from at least January 1, 2010 through April 2013. Merrill Lynch is a CFTC-registered Futures Commission Merchant and approved swap firm located in New York, New York.

The CFTC Order finds that Merrill Lynch’s fee reconciliation process for identifying and correcting discrepancies between the invoices from the exchange clearinghouses and the amounts charged its customers had been faulty for more than two years. As a result, Merrill over-accrued fees from some clients and under-accrued fees from others. These fee reconciliations show that Merrill paid more than $318 million in exchange and clearing fees to the CME and Chicago Board of Trade during that time, but had unexplained over-accruals of approximately $451,318 (0.14% of fees paid) from 196 clients, according to the Order.

Additionally, the CFTC Order finds that Merrill Lynch did not hire qualified personnel to conduct and oversee its fee reconciliations and did not provide any completed procedures manuals regarding fee reconciliations to its staff until at least April 2013. The Order also finds that procedures Merrill Lynch did have up until that time were viewed as ”not fit for purpose” because they were “fundamentally flawed.” Merrill Lynch also did not provide any meaningful training to employees regarding how to conduct fee reconciliations until 2013, the Order finds.

The CFTC Order requires Merrill Lynch to pay a $1.2 million civil monetary penalty and cease and desist from violating CFTC Regulation 166.3 governing diligent supervision. The Order also requires Merrill Lynch to comply with undertakings that include, hiring an outside consulting firm to assist in training staff and reviewing and updating its current procedures regarding exchange and clearing fee reconciliations.

The CFTC Division of Enforcement staff members responsible for this case are Susan Gradman, Joseph Patrick, Brigitte Weyls, Scott Williamson, Rosemary Hollinger, and Richard Wagner.