A US regulator has fined Deutsche Bank $575,000 (£394,000) for disabling a crucial system that was needed to block incomplete trading orders.
The direct market access trading system was designed to block the execution of short sale orders unless a source from which to borrow the security and ensure delivery – known as a ‘locate’ – had been obtained and documented. The system was disabled by Deutsche Bank at certain times over a four year period in order to sidestep a persistent operational fault.
Problems with the firm's systems led to outages that prevented the importing of locate data and, as a result, short sale orders placed for execution were automatically rejected even when a client had already obtained a locate. FINRA found that during these system outages, Deutsche Bank disabled the system's automatic block, permitting even orders without an associated locate.
Meanwhile, National Financial Services in Boston was fined $350,000 (£240,000) by the same regulator – the Financial Industry Regulatory Authority – after it ran a different direct market access system for specific customers, no longer blocking orders without a locate.
"The locate requirement is an essential component of ensuring that short sales are executed properly," said James Shorris, FINRA chief of enforcement. "The failure to design, implement and supervise systems, that reasonably ensure that shares of a security are available to be borrowed before a short sale is executed, significantly undermines the effectiveness of Regulation SHO."
The breaches were discovered, the regulator said, when FINRA reviewed a sample of short sale orders at both firms. In NFS’ case, the company had created a separate manual locate process for 12 of its largest clients, who preferred to obtain locates in multiple securities prior to commencement of the trading day. This meant those clients’ orders did not go through the main stock loan system.
FINRA also found that neither company performed a “meaningful” post-trade review of short sale orders to identify those executed without a valid, associated locate having been obtained or documented. It added that both firms ran “inadequate supervisory systems” to monitor the issue.
In letters to FINRA, the managing directors of Deutsche Bank and the chief compliance officer at NFS wrote that each company “accepts and consents” to the findings being recorded by the regulator, without “admitting or denying” their accuracy. They have both agreed to pay their fines.
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