German regulator warns Deutsche Bank on commodity trading

Alice Ross
Deutsche Bank signage.
Patti Domm | CNBC

Germany's financial watchdog has ordered Deutsche Bank to do more to ensure that commodity prices cannot be manipulated by its traders, in the latest sign that authorities believe some of the world's largest financial markets are still open to abuse.

Deutsche received a letter from BaFin, the German regulator, in April telling the bank it had found faults in the lender's internal controls surrounding the reporting of commodity prices, according to people familiar with the investigation.

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BaFin's move comes as regulators scrutinise a string of financial reference rates including the gold price after global investigations into Libor and foreign exchange rates uncovered evidence of attempted market rigging by a large number of institutions.

The development comes just months after Deutsche announced it was significantly scaling back its commodities arm amid increased regulatory and capital costs that have made the business unattractive.

The lender has since shut trading desks dedicated to energy, agriculture, dry bulk and freight and base metals. Other commodity businesses have been transferred to Deutsche's non-core bank where they will be wound down or sold, while some parts remain active.

Deutsche Bank said: "As we announced in 2013, we significantly scaled back our commodities business and exited entirely non-precious metals trading. As we have previously said, we continue to co-operate with authorities in their industry-wide review of certain benchmarks and are investing to further improve our control environment."

BaFin declined to comment. Commodity prices across a range of markets such as oil, iron ore and thermal coal are collected by external agencies such as Platts and Argus which base their prices on reported figures from banks and other parties. BaFin's investigation at Deutsche studied the risk controls in place at the bank for managing and supervising how prices were submitted.

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The warning from the German regulator comes as the European Commission continues to investigate the setting of physical oil prices. Just over a year ago, Europe's antitrust regulator raided the London offices of Platts as well as oil majors BP, Royal Dutch Shell and Statoil because of concerns that prices may have been manipulated, although no wrongdoing has been alleged.

It said the raids had taken place over concerns that "companies may have colluded in reporting distorted prices to a price reporting agency to manipulate the published prices".

Price reporting agencies publish prices that underpin billions of dollars of trading in oil, gas and electricity and serve as the baseline to calculate household energy bills. Platts and other price reporting agencies such as Argus rely heavily on bid and offer quotes, as well as actual transactions, to assess prices.

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BaFin is carrying out a separate investigation into whether Deutsche manipulated the gold and silver price. The bank has also been ordered to conduct its own investigation into whether manipulation of precious metals prices took place.

Deutsche put its seat in the daily gold and silver price fixing in London up for sale in January, and announced it would withdraw from both seats in April after failing to find buyers. Deutsche, along with the other four banks still participating in the daily London fix – Barclays, Bank of Nova Scotia, Société Générale and HSBC – are facing US class-action lawsuits over alleged gold price rigging. They are contesting.

In May, the UK's Financial Conduct Authority fined Barclays £26 million after one of the bank's traders deliberately suppressed the gold price during the fix to avoid a loss on a derivatives contract.