Regulatory concerns that credit derivatives processing was an expensive accident waiting to happen appear to be confirmed by a report in the Financial Times yesterday that Deutsche Bank is nursing a loss of almost $9 million after failing to produce defaulted bonds in time to claim a payment
According to the report, a US district court judge late last week issued a ruling declaring the German bank had violated the terms of a credit derivative deal it had concluded with a subsidiary of Ambac, a US financial group, several years earlier.
The judge exonerated Ambac from the obligation to make a payment of $8.77 million owed to Deutsche Bank on a Credit Default Swap contract in which the German bank was insured against losses on corporate bonds because Deutsche failed to meet a deadline to produce the bonds within a month following a corporate default on some of them, because they were in custody elsewhere.
The Financial Times noted that missing deadlines on CDS deals is not uncommon at banks, because of the density of the paperwork. Apparently Deutsche Bank argued in its own defence at the court that delays were so commonplace that failure to meet deadlines was almost an “industry practice.” But the judge rejected that defence, arguing the CDS deal was a legal contract like any other.
The report notes that some lawyers see the case as unusual, and that it occurred several years ago, before improvements in administrative practices were made.