CFTC Helps Deutsche Bank Avoid "Bad Actor" Tag

Last week, Deutsche Bank agreed to pay $2.5 billion (or around $25,000 per employee) in connection with its role in manipulating LIBOR, EURIBOR, and a few other -BORs. Incidentally, the settlement also gave the world a window into just what star prop trader Christian Bittar (to whom we introduced readers in 2012) said to colleagues on the way to ‘fixing’ the fixings so to speak. Here are some highlights:

“My cash desk will be against us so we’ll have to do some lobbying,” 





As we noted when the news first broke, no one will go to jail for this of course, but theoretically, the settlement (which included payments to the NYDFS, the DOJ, the UK’s FCA, and the CFTC) should have landed Deutsche Bank on the SEC’s “bad actors” list, which is kind of like the Dodd-Frank equivalent of ‘time out’ and restricts the offender from participating in exempt securities offerings. Well as you might imagine, that’s no fun if you’re a Wall Street bank and it could end up costing you quite a bit of money in lost underwriting fees, but fortunately, there’s a way around it — you simply convince the regulator you settle with to exempt you from the SEC “bad actor” ban. Here’s WSJ with more:

Deutsche Bank AG last week was able to avoid the threat of a ban on selling stakes in hedge funds by tucking specific language into an $800 million agreement it reached with a different regulator—the Commodity Futures Trading Commission—to resolve an interest-rate-rigging probe.


Five other banks had similar provisions included in CFTC agreements resolving allegations of currency manipulation in November.


The language allows the banks to avoid asking the SEC for a waiver—a process that has become fraught with uncertainty amid commissioner disagreements over whether to allow financial firms to avoid a “bad actor” ban…


The 2010 Dodd-Frank law imposed certain restrictions on financial firms when they face securities-related criminal convictions or regulatory orders that involve fraud or manipulation charges.


Companies are restricted from selling private offerings for five years unless they get a waiver from the SEC to bypass the ban.


Institutions raised $903 billion in capital in 2012 through the type of offerings the bad-actor bar would impact, according to an SEC study.


But the SEC’s own rule governing the bad-actor ban allows language waiving the disqualification to be included in a regulatory settlement. 

Here’s the specific passage in Deutsche Bank’s CFTC settlement which makes the “bad actor” designation null and void:

Of course it’s not just Deutsche Bank…

The same language was used in the settlements the CFTC reached with Citigroup Inc.,J.P. Morgan Chase & Co, Royal Bank of Scotland PLC, UBS AG and HSBC Holdings PLC in November, which together agreed to pay $1.4 billion in penalties to resolve charges that they tried to manipulate global foreign-exchange benchmark rates to benefit trader positions. The firms neither admitted nor denied the allegations.

...and in the final estimation, no bad actors will end up being classified as bad actors...

Some of the same banks are also expected to plead guilty to criminal antitrust charges in the coming weeks to end related Justice Department probes, which are not likely to trigger the bad-actor bar because they won’t involve securities violations. That means many of the institutions are unlikely to face the bad-actor bar at all. 

It’s good to be TBTF.