South Korean prosecutors have charged four Deutsche Bank employees along with Deutsche Securities Korea with illegally manipulating Seoul's stock market in order to earn more than US$40 million in a single day.
According to the New York Times, the one-day stock rout on November 11th last year caused US$27 billion in value to be wiped out from South Korea’s equity market with the KOSPI (Korea Composite Stock Price Index) falling by a hefty 48 points in the session's last 10 minutes due to arbitrage trading between the spot and futures markets.
In April this year, Deutsche Bank was banned from trading shares and derivatives for its own account for six months from April 1, the heaviest penalty imposed on any securities company in Korea.
The Frankfurt-based bank has since denied the charges and has promised to defend itself in court. The fate of the four employees, however, is uncertain. According to representatives from Deutsche Bank, all four employees – three of whom were foreigners – have been either suspended or been placed on administrative leave. The bank has said that it didn't authorize or condone any breach of market regulation.
Prosecutors though are adamant that Deutsche Bank's securities unit in Seoul and the four workers had knowingly placed heavy sell orders to pocket massive returns from put options, which were structured to generate profits if the KOSPI plunged.
"All profits they made illegally have been confiscated by the court," said Lee Seok-Hwan, a chief prosecutor on the case, as quoted by AFP.
Mr Lee added that South Korea's securities market – the world's largest in terms of volume of stock index options trading – was "seriously damaged" by the accused.
South Korea, in common with other developing markets, has grown increasingly concerned at the potential risks posed by rapid flows of foreign capital.
In January this year, local authorities announced new rules designed to reduce the risk of sharp stock market volatility triggered by derivatives trading.
Since March 7, Institutional investors are now allowed only a maximum of 10,000 futures and options contracts in any “speculative” transaction. Previously there were no limits on options, while institutions were limited to holding 7,500 futures contracts and individuals could hold 5,000.