Korean regulator the Financial Services Commission (FSC) has banned Deutsche Bank's Korean broker-dealer business from operating for six months, following allegations of market manipulation in KOPSI 200 options.
The ban on Deutsche Securities Korea will run from 1 April 2011 to 30 September 2011. During this time, the firm will be unable to execute securities and exchange-traded derivatives transactions as a dealer, or facilitate direct market access as a broker. Some existing “unavoidable” derivatives transactions that have already been issued by Deutsche Securities Korea will be allowed to stand.
The ban follows an investigation conducted jointly by Korea's market oversight authority the Financial Supervisory Service (FSS) and the Korea Exchange (KRX) from 12 November 2010 to 21 January 2011 into Deutsche Securities Korea and Wise Asset Management.
The investigation found that during the last ten minutes on trading on 11 November, an expiry date for KOPSI 200 options contracts, Deutsche Bank sent through a huge trade that forced the index down by 2.79%, gaining 44.87 billion Korean won (US$39.81 million) worth of profits. The trade made up around 14% of total KOPSI volume on the day. Deutsche Bank directors in Hong Kong were also found to be involved in the market manipulation.
After the events of 11 November, the FSC and FSS announced a number of new rules designed to prevent speculative and arbitrage transactions and abnormal transactions.
These included the requirement for KRX members to set daily order limits for each of their qualified institutional clients based on their total assets, size of assets under management and credit worthiness, as well as the need for pre-trade margin deposits for qualified institutional investors with less than 500 billion Korean won (US$443 million) in total assets or financial investment managers with less one trillion won in collective investment assets. On option expiry dates, positions in KOSPI 200 options and futures for an institutional investor will be limited to 10,000 contracts, regardless of the nature of such positions (speculative, hedging and arbitrage trading). This is the equivalent of about 1.3 trillion won (US$1.152 billion) in spot-market trade.