A monitor displays Deutsche Bank AG signage on the floor of the New York Stock Exchange (NYSE) in New York, U.S.(Photographer: Michael Nagle/Bloomberg)

Deutsche Bank Said to Face $60 Million Derivative Trade Loss

(Bloomberg) -- Deutsche Bank AG, the German lender seeking to overhaul how it manages risks, made a bet on U.S. inflation that puts the firm on course to lose as much as $60 million, people familiar with the matter said.

The trade used derivative products tied to U.S. inflation, said the people, who requested anonymity because the details aren’t public. The Frankfurt-based lender has been examining whether Deutsche Bank traders breached risk limits on the deal, some of the people said. The case has been escalated to the bank’s supervisory board, one person said.

Chief Executive Officer John Cryan has been trying to improve risk and operational controls that have drawn scorn from regulators around the world. A risk limit violation could indicate a weakness in the bank’s oversight of traders in a business that earned about $270 million in the first quarter. Just two months ago, the Federal Reserve fined Deutsche Bank for failing to ensure that traders abide by the Volcker Rule, a U.S. law that restricts lenders from using their own funds to make speculative trades.

“If it is true that a single trade could cause such a loss at Deutsche Bank, then this would be a clear setback to Cryan’s efforts to improve controls,” said Michael Seufert, an analyst with NordLB who has a sell recommendation on the stock. “He has vowed to end such control failures.”

An official for Deutsche Bank in New York declined to comment.

Deutsche Bank made the transaction in anticipation of how clients were going to trade and isn’t expecting the bet to reverse, one of the people said. Inflation traders buy and sell bonds linked to inflation, such as Treasury Inflation-Protected Securities, and other derivatives like options.

In a separate case, the bank last year began a review into whether it misstated the value of derivatives used to bet on inflation known as zero-coupon inflation swaps. The bank shared its findings with U.S. authorities, Bloomberg reported.

Deutsche Bank, one of the biggest banks in Europe, had about 661 billion euros ($750 billion) of so-called Level 2 and Level 3 assets at the end of 2016, an annual report shows. These are investments that include many kinds of derivatives. Banks often rely at least partly on their own internal models to value these instruments.

The European Central Bank has raised concerns with Deutsche Bank about how it manages and values its derivatives, Italian newspaper Il Sole 24 Ore reported in March. A spokeswoman for the ECB declined to comment.

The German lender’s fixed-income pretax profit was driven by 2.3 billion euros in revenue in the first quarter, an 11 percent increase on the year earlier. Revenue from products tied to interest rates was “significantly higher,” Deutsche Bank said.