The German banking giant is leaving the U.S. business as part of a cost-cutting measure.
Deutsche Bank ended its over-the-counter (OTC) swaps clearing business for the U.S. market last week because of a streamlining push by bank officials to move out of profit-challenged businesses, according to a source familiar with the situation.
For Deutsche Bank and other organizations offering clearing support, the OTC swaps clearing business in the U.S. has been on a downward trend. The institution’s exit follows the departures over the past three years of other firms from the business such as BNY Mellon, Royal Bank of Scotland (RBS), State Street and Nomura (https://www.ftfnews.com/nomura-joins-retreat-from-swaps-clearing/1749).
For instance, in May 2015, Nomura Holdings announced that it was leaving the clearing game for swaps transactions, and was one of several banks to back away from clearing amid low margins and high costs imposed mainly by post-crisis, global regulation. Yet, prior to Nomura’s news, Bank of New York Mellon and State Street had already announced that they were exiting the clearing business.
The sum effect of these departures is the concentration of risk among the remaining clearing banks and organizations, which is the opposite result that regulators wanted when they made clearing mandatory for most types of derivatives.
However, regulators have not taken any action to undo the unintended consequences of conflicting global regulations such as the Basel III capital requirements, which make banks hold more cash against clients’ loans, swaps and other outstanding assets. These capital-intensive rules and other reforms have hit banks hard, causing many to step away from middleman clearing services.
The bottom line pressures of the clearing business made it a primary target for Deutsche Bank’s Strategy 2020 cost-cutting initiative, which among other efforts calls for the elimination of 9,000 staff positions from the bank’s global work force. Most recently, bonuses for the bank’s top managers were scaled back following multi-billion dollar settlements with regulators, aggressive yet profit-gouging layoffs, and other cost-cutting measures.
The retreat from the U.S. swaps business will not impact the bank’s clearing business for listed derivatives in the U.S., and the OTC retreat will not be replicated elsewhere across Deutsche Bank’s non-U.S. branches, the source says.
Starting in 2010, Deutsche Bank’s clearing business began as a mix of prime brokerage, listed derivatives, and OTC clearing and intermediation services. The list of offered services include margin segregation, cross asset/product margining, pre- and post-trade portfolio analysis tools, margin financing/collateral flexibility and portfolio compression.
Since the Dodd-Frank act, a new system has been underway for clearing OTC swaps (among other derivatives) that included swap execution facilities (SEFs), involving clearing and execution brokers. The reformed system for OTC swaps also has two tracts – one for security-based swap instruments, overseen by the SEC, and another for swaps based upon interest rates, commodities, indices and foreign currency exchanges, overseen by CFTC.
Deutsche Bank clients impacted by the departure will be getting assistance to move to other providers of clearing services, the source adds.
Officials at Deutsche Bank decline to comment for this story.
The CFTC maintains a list of derivatives clearing organizations (DCOs) that includes whether or not they are offering services and the kinds of services they offer: https://sirt.cftc.gov/sirt/sirt.aspx?Topic=ClearingOrganizations .
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