The Financial Services Authority (FSA) has fined Morgan Grenfell & Co Limited (Morgan Grenfell), a wholly owned subsidiary of Deutsche Bank, £190,000 for breaching FSA Principles by failing to act in its customer’s best interests and failing to manage its conflicts of interests. The FSA found that Morgan Grenfell commenced proprietary trading in seven of the constituent securities of a client’s programme trade, prior to its award, based on limited information provided to enable the firm to quote for that business. The proprietary trading resulted in the client paying more for the programme trade than they would otherwise have done.
“By pre-hedging the programme trade Morgan Grenfell ultimately disadvantaged its customer, a fund manager, in the price they paid for the trade, and the underlying investors in the relevant funds,” explains Andrew Procter, FSA Director of Enforcement. “A firm which proposes to engage in pre-hedging should ensure that it informs the customer in advance that it might trade in the component securities based upon the information supplied or can otherwise demonstrate that its participation in the market does not disadvantage the customer. It is expected that firms have in place systems and controls to minimise the impact that any pre-hedging by the firm is likely to have on the customer’s interests. The FSA views these obligations as fundamental to maintaining efficient, orderly and clean markets.”
Morgan Grenfell, along with two other brokers, was contacted by the customer and provided with limited information, in respect of seven stocks, to obtain a quote for a blind bid principal programme trade which would comprise 55 FTSE 100 securities worth £65 million. The firm correctly identified the seven component securities and guessed the client’s intention to buy the portfolio. Morgan Grenfell’s programme trading desk, having decided to bid, proceeded to trade in the seven securities. The firm began trading in the securities, including Daily Mail & General Trust (DM>), at 11.41 and provided the client with its quotations at 11.43. The trade was awarded to Morgan Grenfell at 11.59 with a strike time of 12.02:15. Morgan Grenfell continued trading in the seven securities until shortly after the strike time. In the twenty minute period during which it had been trading the firm represented 93.5% of total purchases in DM> with the price rising 9.99%. The remaining six securities rose from between 1.12% to 3.81% in the same period. The illiquidity of some of the securities combined with the volumes traded over this short period increased the likelihood of the prices increasing significantly. The programme trade price was subsequently struck at these higher prices. The FSA Principles require all firms to treat customers fairly and to manage any conflicts of interest fairly. Morgan Grenfell failed either to inform the customer in advance that it might trade in the component securities based upon the information supplied or to ensure that its participation in the market did not cause the customer to suffer a disadvantage. The programme trading which was previously conducted by Morgan Grenfell is now conducted by Deutsche Bank AG, London. Deutsche Bank is now in the process of informing its customers of the basis on which it engages in principal programme trading. In setting the penalty the FSA took into account that compensation had been paid by Morgan Grenfell to the customer.