Macaskill on markets: Deutsche’s Autobahn escape ramp

COPYING AND DISTRIBUTING ARE PROHIBITED WITHOUT PERMISSION OF THE PUBLISHER: SContreras@Euromoney.com

By:
Jon Macaskill
Published on:

Questions about Deutsche Bank's restructuring multiply with each tactical shift, increasing the premium placed on any areas of real success – such as its Autobahn platform.

Deutsche collapse_780

Deutsche Bank’s Autobahn electronic service offers trade execution and analytics across asset classes, but it is best known for its role in the FX markets. Deutsche was an early mover in taking its flow FX business electronic and upgrades to Autobahn’s functionality were a key element in its successful recent bid to regain lost FX market share.

Deutsche jumped to second place in this year’s Euromoney FX survey, from the number eight slot in 2018, and was ranked first in western Europe, up from fifth last year.

The bank was understandably keen to stress this progress when it announced its second-quarter results on July 24, along with its number one position as high-yield debt underwriter in EMEA for the year to date and a role in 16 out of 25 top regional investment banking deals by fee value.

These bright spots came against a backdrop for Deutsche that remains deeply gloomy. Deutsche took €3.4 billion of charges related to its planned restructuring in its second-quarter earnings, which pushed it to a net loss of €3.1 billion.

Chief executive Christian Sewing is being given credit by investors and analysts for finally tackling Deutsche’s structural problems, but executing a withdrawal from equities trading and some rates markets without suffering a catastrophic slump in revenues will be challenging, to put it mildly.

Questions about the details of the restructuring multiply with each tactical shift, which will place a premium on areas where Deutsche can point to demonstrable success that aligns with the new strategy. FX fits this bill. Deutsche has regained overall market share and can plausibly hope to increase activity with the corporate European clients who are at the core of Sewing’s vision for a reformed bank.

Secret weapon

Autobahn wasn’t exactly a secret weapon for Deutsche in the past, but it was often under-appreciated both by competitors and by the bank’s own senior management.

Troy Rohrbaugh, head of global markets at JPMorgan, recently recalled to Euromoney that he did not appreciate the gap between his firm and Deutsche in electronic FX trading until he started visiting clients and discovered the extent to which they relied upon Autobahn.

Rohrbaugh joined JPMorgan in 2005 with a mandate to boost FX revenues. Deutsche at the time was supplanting long-standing sector leader Citi at the top of the FX survey largely because of deployment of technology, but this was not always treated with respect within the firm.

Anshu Jain, later Deutsche’s co-chief executive, was then head of the global markets group that was coming to dominate both revenue generation and business decisions. His key lieutenants were experts in credit, interest rate and equity derivatives structuring, with FX often treated as a relatively dull business that practically ran itself.

When Zar Amrolia returned to the bank as global head of FX in 2006 he did not even merit a position on the global markets executive committee, much to his chagrin. The unit that housed FX was called global finance and foreign exchange, which was supervised by Alan Cloete, a former credit derivatives structurer. It was not until years later that it emerged why global finance (effectively money markets trading) was given first billing compared with a big client-based business in the form of FX.


Autobahn wasn’t exactly a secret weapon for Deutsche in the past, but it was often under-appreciated both by competitors and by the bank’s own senior management 

The global finance unit was at the centre of allegations over the Libor and Euribor rate rigging that helped Deutsche to avoid a state bail-out during the 2008 financial crisis and, arguably, delayed the restructuring that is so belatedly taking place today.

Christian Bittar, the trader whose money market desk generated €1.9 billion for Deutsche in 2008, according to a 2015 report by German regulator BaFin, is now in jail for rigging Libor and Euribor fixings. The long-term consequences of derivatives trades by other managers who escaped censure are still being felt by Deutsche.

Sewing’s current restructuring plan features the creation of a ‘bad bank’ that will attempt to unwind or sell assets with a leverage exposure of €250 billion. Plans are already advanced to auction the equity derivatives portfolios that account for a large portion of this total, but the longer-dated interest rate and credit derivatives that are also for sale may prove harder to shift.

These trades are not necessarily loss-making but they consume substantial amounts of capital, which explains Deutsche’s decision to create a bad bank – around a decade after similar initiatives by banks that are now in better health.

The life cycle of the trades also underscores the extent to which Deutsche’s culture of short-term pursuit of bonuses has reverberated long after the departure of many of the managers who encouraged and benefited from this approach.

Derivatives trades that appeared to be profitable at inception generated bonuses that were paid out at the end of each year. Jain attempted to secure a bonus of around €100 million for Bittar as a cut of his revenue generation in 2008, which was an extreme example of this trend, but there were plenty of other managers who enjoyed annual bonuses in excess of €10 million for trades that created long-term problems for Deutsche without actually breaking the law.

Sceptics

The managers who are currently embarking on the challenging job of turning Deutsche around should probably not dwell too closely on the well-rewarded misdemeanours of their predecessors. That could easily prove dispiriting.

Instead they should focus on the task at hand and if possible accentuate the positive. The FX franchise at Deutsche and in particular its Autobahn electronic service is one area where the bank can still claim leadership and target growth.

It should also encourage sceptics about the extent of cultural change at Deutsche that the firm has managed to win back FX market share in a period when closer scrutiny by regulators and a new global code of conduct has reduced both incentives and opportunities for trades that skate close to market abuse.

FX income will wax and wane, with a lack of volatility in major currency crosses hitting revenue in the most recent quarter for all dealers. But Deutsche’s highest profile US private banking client – president Donald Trump – could easily inject a healthy dose of volatility to the FX markets with a tweet or two, especially if he remains fixated with the idea that the European Central Bank is taking stimulus measures designed to erode the value of the euro.

The old Deutsche might have been tempted to engineer a way to profit from any shift with complex trades designed to shift downside risk to clients, while capturing supposedly risk-free arbitrage for itself. Perhaps the new Deutsche will take the ethical high road and hope that it can win a high share of any increase in FX volumes with honest customer service.

Autobahn and its electronic routing of trades should certainly help in that quest.