Deutsche Bank unit fined HK$6m over facilitation trading

The Securities and Futures Commission has reprimanded a Hong Kong securities unit of Deutsche Bank and fined it HK$6 million for failing to prevent potential conflicts of interest while trading with clients.

An SFC probe found that from May 2001 to September 30, 2005, Deutsche Bank Securities Asia failed to put in place an adequate system to identify and resolve potential conflicts of interest arising from mingled proprietary and client trades executed by its facilitation trading desk.

Facilitation trading involves brokers and clients executing transactions on a principal-to-principal basis, rather than on an agency basis. Because the broker is dealing with the client as a principal rather than as an agent, conflicts of interest may arise.

It said Deutsche Bank's securities unit failed to maintain effective compliance to detect and manage risks to clients when dealing with clients as principal. It also failed to keep adequate audit trails of client order instructions.

'Brokers offering facilitation services must ensure their systems effectively record that the client involved knows the transaction is not a normal agency trade and that the execution of the order as a proprietary or agency order is clear,' said Mark Steward, the SFC's executive director of enforcement.

'This is a case where these fundamental systems were not in place.'