Morgan Grenfell Fined By FSA For Conflicts Of Interest

by Robin Pilgrim, LawAndTax-News.com, London

08 April 2004

Deutsche Bank subsidiary, Morgan Grenfell has been fined £190,000 by the UK's Financial Services Authority (FSA) for failing to properly manage conflicts of interest within its programme trading operation.

According to an FSA statement on the matter released on Monday, Morgan Grenfell had disadvantaged an institutional client by 'pre-hedging' a multi-million pound trade of FTSE 100 shares.

In April 2002, a fund manager (unnamed in the statement) approached Morgan Grenfell asking for a quote on a £65 million programme trade in 55 FTSE 100 stocks. Having guessed the identity of seven of the stocks, and further predicting that the fund manager wanted to buy the shares in question, the firm's trading desk began buying the shares itself in order to hedge its own risk if it won the order.

Pre-hedging is not an illegal practice as long as the broker informs the client that it has taken place, and the client does not lose out financially as a result. However in this case, the client was not informed, and as a result of Morgan Grenfell's pre-hedging the prices of the seven shares in question rose, in one case by as much as 10%.

Andrew Procter, FSA Director of Enforcement, explained that:

“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."

He continued:

"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," and concluded:

"The FSA views these obligations as fundamental to maintaining efficient, orderly and clean markets.”

Deutsche Bank announced this week that the fund manager in question had been compensated.

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