Deutsche Bank Said to Lose Money on Risk-Management Trades

(Bloomberg) -- Deutsche Bank AG, the troubled German lender, sought to minimize risk at its U.S. equities business. Instead, the bet ended up in the red.

Traders in New York pooled billions of dollars of positions into one portfolio, known as a central risk book, in an attempt to avert losses and potentially make more money, people familiar with the strategy said. Yet the wagers stumbled, leading to a $60 million loss this year, said the people, who asked not to be identified because the details are private.

The fallout forced Deutsche Bank to slash the book’s size, while one of the traders in charge has since moved to another role, said the people. It’s not clear when the loss was reflected in the bank’s accounts this year.

Central risk books have become a trend at some of the world’s biggest investment banks. Instead of dozens of workers across numerous desks working to limit possible losses, trades are transferred to a single CRB where they are managed by a small team, often with the help of complex algorithms. But at Deutsche Bank, part of that strategy didn’t perform as well as desired, the people said.

Deutsche Bank Said to Lose Money on Risk-Management Trades

The losses, while manageable for one of Europe’s top investment banks, are a window into Deutsche Bank’s problems both at its equities business -- which has reported quarterly declines in revenue since 2015 -- and in the U.S., where regulators have been scrutinizing its controls. Chief Executive Officer Christian Sewing has targeted the stocks division for cutbacks since he took the top job in April.

Deutsche Bank Said to Lose Money on Risk-Management Trades

“Looking at isolated losses in central risk books is misleading since it does not take into account other related trading books or offsetting factors such as commissions earned,” Kerrie McHugh, a spokeswoman for Deutsche Bank in New York, said in an email. She declined to elaborate on specifics.

Executives at the firm started increasing the size of the CRB for the U.S. equities business in late 2016 and continued until this year, when it contained about 2 billion euros ($2.3 billion) of trades, the people said. One person said the pool contained positions in both common stock and equity derivatives, complex contracts that derive their value from shares.

In theory, CRBs should let banks cut costs, improve profit and bolster risk management. Yet the strategy floundered, partly because of issues with the CRB’s technology, according to the people. One of the problems was how well the team’s algorithms analyzed the trading success of counterparties, they said.

The CRB may also have become too big to manage properly, one of the people said.

“The devil’s really in the detail, as it depends over what period this loss was sustained and how much commission can be used to offset it,” said Kris Milne, a former trader who worked on a central risk book at Credit Suisse Group AG in London. “Nonetheless, it’s a very significant amount on the face of it, potentially multiples of what they’d be expecting to make in annual desk profit.”

Deutsche Bank executives have since shrunk the size of the CRB to about several hundred million euros, the people said. Ryan O’Sullivan, a trader who helped oversee the strategy, moved to the role of global co-head of electronic equities in May of this year, according to his LinkedIn page. He was promoted, according to McHugh, the spokeswoman.

Deutsche Bank’s “high-touch” U.S. equities unit, the part of the division that arranges stock trades with human involvement rather than “low touch” electronic trades, has “generated positive net revenues year to date,” according to McHugh. Some of the losses at the CRB occurred because of increased transaction costs and reduced client activity rather than problems with the firm’s trading analysis or technology, she said, declining to specify figures.

Deutsche Bank executives, led by global equities chief Peter Selman, may increase the size of the CRB at the U.S. equities business in the future, the people said. Brad Kurtzman, equities-trading co-head with oversight for the Americas, has overseen changes in risk management since the losses occurred, one of the people said.

After CEO Sewing took over in April, he announced a revised strategy for the lender that included shrinking the equities business. The division has struggled for three years, including a 15 percent year-on-year decline to 1.6 billion euros for the first nine months of 2018, filings show.

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