Deutsche Bank's $9m Loss Highlights Risks in Credit Derivatives Market

Strategic Insights -

A ruling by US district court judge Denise Cote has declared Deutsche Bank in breach of contract in a credit derivative deal with Ambac, resulting in a loss of almost $9m for the German bank. The case highlights the risks associated with sloppy back-office practices in the booming credit derivatives market, where banks often miss deadlines for delivering underlying bonds.

Key Takeaways:

  • Deutsche Bank lost a case in a US district court against Ambac, with the judge ruling that the bank failed to meet a deadline to deliver bonds following a corporate default.
  • The bank argued that delays in completing paperwork for credit default swaps (CDS) deals are common, but the judge dismissed this argument, stating that a CDS deal is no different from any other legal contract.
  • The case revolves around a "triplets" transaction between Deutsche Bank and Ambac, which was first agreed in 1998 and updated in 2000.
  • Deutsche Bank promised to deliver Solutia bonds to Ambac within a month in case of a corporate default, but failed to do so due to a "pass the parcel" arrangement with JPMorgan and Credit Suisse.
  • The case has big implications for the credit derivatives industry, with Janet Tavakoli, a CDS consultant, warning that investors who buy protection in CDS contracts requiring physical delivery might not be protected if they cannot get hold of the bonds in time.

Statistics:

  • $8.77m: the amount Deutsche Bank claimed it was owed by Ambac on a Credit Default Swaps contract.
  • $9m: the total loss Deutsche Bank faces due to the missed deadline and the court ruling.
  • 60: the number of corporate bonds, including those issued by Solutia, that Deutsche Bank was insured against with Ambac's CDS contract.
  • 1998: The year in which the "triplets" transaction was first agreed between Deutsche Bank and Ambac.
  • 2000: The year in which the "triplets" transaction was updated.
  • 2003: The year in which Solutia filed for bankruptcy.
  • $8.77m: the amount Deutsche Bank was promised to pay Ambac if Solutia bonds went into default.

Sources:

  • "Deutsche Bank Loses Case Over Credit Swap" by Gillian Tett, Financial Times