Deutsche Bank Steps in Doo-Doo, Again!

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Germany’s Biggest Bank Banged $12.5 mil by Finra for Hooting and Hollering via Firm’s Squawk Box

For those not following the travails of Germany’s biggest investment bank and broker-dealer Deutsche Bank, suffice to say this bank has had its full share of comeuppance throughout the past many months. If nothing stings more than getting hit with a big fat fine from Finra, the sting is more palpable when its a $12.5 million smack for hooting and hollering confidential information over a company-wide ‘squawk box.’ Below courtesy of Business Insider columnist Portia Crowe:

(Business Insider) Aug 8-Deutsche Bank allowed potentially confidential research and trading information to be broadcast over internal speakers, according to the Financial Industry Regulatory Authority, or Finra.

That body fined Deutsche Bank $12.5 million after finding that the German bank was aware that broadcasts, known as “hoots” or “squawks,” contained potentially confidential or price-sensitive information but “repeatedly ignored red flags” suggesting it wasn’t adequately supervising the loud systems.

Traders regularly communicate across desks over internal speaker systems known as “squawk boxes.”

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At least one registered representative of the firm communicated potentially confidential and/or material nonpublic information to customers as a result of the supervisory deficiencies, according to a filing from Finra.

That provided the recipients with a potential informational advantage over other customers.

“Deutsche Bank’s disregard of years of red flags including internal audit findings, risk assessments, and compliance recommendations was particularly egregious given the risk that material nonpublic information could be communicated over squawk boxes,” Finra’s chief of enforcement, Brad Bennett, said in a statement.

Deutsche Bank neither admitted to nor denied the charges. The full story via this link to Business Insider

Broker-Dealers: CAT Got Your Tongue?

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Broker-Dealers are continuing to add to their compliance and regulatory ‘need-to-do’ checklist and in a recent SIFMA submission to the SEC, the list of items under the category Consolidated Audit Trail aka CAT compliance is only growing longer.  One senior compliance officer representing a regional broker-dealer went so far as to suggest that when questioning a staff member as to the status of a recent technology upgrade to the audit trail system, he received a blank look in response and found himself asking, “What’s wrong? Cat got your tongue?”  The staffer replied, “Not my tongue, my b-a-#-@-s!”

Below, courtesy of Traders Magazine’s Patrick Flannery, please find find a consolidated view of what broker-dealers are now contending with in terms of implementation challenges.

For broker-dealers, the Consolidated Audit Trail (CAT) may seem to be another weighty technical challenge, whose cost and implementation challenges will fall disproportionately on their shoulders (and their budgets). In fact, last week, SIFMA submitted a letter to the SEC detailing exactly how burdensome CAT will be.

The current plan, according to SIFMA, “would impose the vast majority of CAT-related costs on broker-dealers.” In its letter to the SEC, the US lobbyist asked the agency to demand that the parties developing CAT, namely, the exchanges and FINRA, explain how they justify requiring “broker-dealers to bear any of the financial burden of funding a system that exists to receive and process information that broker-dealers are required to report under SEC regulations.”

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What’s more, while the data submitted to CAT will give regulators better oversight, which is expected to help promote market fairness, several securities industry insiders have begun to question what type of access broker dealers will have to this data.  As we understand, it’s unclear at this point whether broker-dealers will to be able to directly query the very data that they must bear the burden (and cost) of collecting and reporting.

Despite these challenges, things may not be as bad as they seem. For those who learn to understand the value of the data they’re collecting, and how it can be mined for market insight, there’s potential for significant upshot.

The Heavy Lifting

CAT will be a much more detailed and sophisticated form of audit trail than FINRA’s OATS system, to which firms currently report data for regulatory oversight purposes, and as a result, reporting requirements will be significantly more complex. The data that CAT will consolidate is voluminous, and for many firms, who have this data stored in disparate systems, gathering, organizing and time stamping CAT data for reporting purposes will be a substantial if not a near-colossal undertaking.

Some aspects of CAT reporting are so challenging it’s hard to see the bright side. For example, every broker-dealer, exchange and all other self-regulatory organizations (SROs) reporting to CAT will have to establish and maintain a system of unique IDs for customers, accounts, counterparties and orders. The ultimate goal:  the entire life cycle of any equity or options order can be preserved for future review. A trade, originated through a retail broker, e.g., that is routed through a broker-dealer and executed on an exchange, should be able to be stitched together and reconstructed from CAT data so that the full picture is viewable from multiple perspectives.

When an original order is received, firms will have to capture and report an ID number of the customer originating the order, a CAT order ID, an identifier of the firm receiving the order, terms of the order and a time stamp measured to CAT time-stamping requirements (currently 50 milliseconds).

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