On April 8, 2013, FINRA announced that it had censured and fined Deutsche Bank Securities Inc. $275,000.00 for violating FINRA’s rules by failing to establish and enforce adequate supervisory procedures regarding dividend-related yield enhancement on total return swap transactions that involve U.S. equities.
An equity-based swap is a contractual arrangement between two parties who agree to exchange cash flows that replicate the economics of owning an underlying equity. The buyer of a swap has the risks and benefits similar to those of owning the underlying equity, while the seller of the swap has countervailing risks and benefits. From at least 2002 through 2011, Deutsche Bank did not maintain any written procedures for how to supervise or document decisions that impacted dividend uplift on swap trades referencing U.S. dividend-paying securities.
For the reviews that were conducted, the Firm developed a document so that overall client trading patterns could be monitored and potential red flags regarding the use of Total Return Swaps could be identified by desk personnel. However, this document and the Firm’s review of it were insufficient in that the document was based on data that did not facilitate adequate monitoring.
Deutsche Bank was aware that it needed to improve its record keeping regarding swaps, so as to better manage risks associated with yield enhancement on Total Return Swaps. However, the Firm did not put in place systems to retrieve sufficient data for managers’ review of executions made by the desk staff. The records regarding market-on-close pricing or cross trades were not adequate under NASD Rule 3010.
In settling this matter, Deutsche Bank Inc. neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.