Deutsche Bank hit with record $2.5bn fine for rate-rigging

Traders work at their screens in front of the German share price index DAX board at the stock exchange in Frankfurt April 23, 2015 (Reuters / Stringer)
Germany’s biggest lender has been fined $2.5 billion by US and UK regulators for manipulating market key rates including Libor, the benchmark for interest rates on trillions of dollars of financial contracts.

The bank admitted in Thursday’s settlement that its employees rigged the yen Libor (London Interbank Offered Rate) and the Brussels and Tokyo equivalents, Euribor and Tibor, to benefit their trading book and those of traders at other banks.

This is the biggest fine in a Libor case to date.

The fixing of the interest rates by Deutsche Bank employees in London and Frankfurt from 2005 to 2009 was deliberate, and the employees were aware that it was wrong, the New York State Superintendent of Financial Services Benjamin M. Lawsky said on Thursday.

“Deutsche Bank employees engaged in a widespread effort to manipulate benchmark interest rates for financial gain.” He also added that it’s “individuals who do deliberate wrongdoing while markets do not manipulate themselves.”

Deutsche Bank also acknowledged that its internal monitoring systems were insufficient to prevent the manipulation of Libor, the statements from regulators said Thursday.

The authorities have ordered seven managers suspected of involvement in the rigging to be fired. They are reportedly among more than two dozen employees believed to have taken part. Most have already left the bank.

The $2.5 billion penalty on Deutsche Bank includes $600 million to the New York State Department of Financial Services (NYDFS), $800 million to the Commodities Futures Trading Commission (CFTC), $775 million to the US Department of Justice (DOJ), and approximately $340 million to the United Kingdom’s Financial Conduct Authority (FCA).

The verdict puts an end to a long-running investigation by US federal and New York State regulators and law-enforcement officials, as well as the UK’s Financial Conduct Authority.

Deutsche Bank said on Wednesday it had added €1.5 billion ($1.61 billion) in litigation reserves in the first quarter, on top of the €3.2 billion it had previously set aside. It is the latest financial institution to be fined by the US and UK in their seven-year investigation.Last year BNP Paribas was fined nearly $9 billion after pleading guilty to violating US sanctions. Germany’s second largest bank, Commerzbank AG paid $1.45 billion in March for a similar misdemeanor.

In 2013 Deutsche Bank paid €725 million to settle a European Union antitrust investigation involving interest rate manipulation along with other US and European banks.

IBOR fixing

The three rates - Libor, Tibor and Euribor - are collectively known as IBOR.

Libor is a primary global benchmark for short-term interest rates, 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. For individual banks, Libor is in an indicator of the lender’s health. It reflects the cost at which a bank concludes it can borrow funds. A high submission suggests that the bank would pay a high amount to borrow funds, which could point to a liquidity problem and indicate that the bank has financial difficulty.

From 2005 to 2009 some of the 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,” according to the New York State Department of Financial Services press release.

The press release also cites a dialogue from February 21, 2005, when one trader requested another trader who performed submitter duties on a back-up basis.

"Can we have a high 6-mth libor today pls gezzer?"

"Sure dude, where wld you like it mate?" (Trader/submitter)

"Think it shud be 095?"

"Cool, was going 9, so 9.5 it is." (Trader/submitter)

"Super – don’t get that level of flexibility when [the usual submitter] is in the chair fyg!" – the trader joked.