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Derivatives

Korean Structured Market Grinds To A Halt

A regulatory investigation into bribery allegations against a Deutsche Bank employee in Korea has stopped dead one of Asia's fastest growing structured derivatives markets.

A regulatory investigation into bribery allegations against a Deutsche Bank employee in Korea has stopped dead one of Asia's fastest growing structured derivatives markets. The employee, Hee-Chung Hwang, a director in the corporate coverage group at Deutsche Bank in Seoul, has been suspended and could not be reached. Michael West, spokesman at Deutsche Bank in Hong Kong, said, "This is a matter for the individuals charged." He declined further comment.

"This was a shock," said a fixed-income marketer at a U.S. firm. Bankers said volumes have dried up. "The liability market will be frozen for the rest of the year--we need to shift our focus to asset products," said a manager at a derivatives house, noting quasi-government issuers will shy away from structured derivative issuance.

Late last month the Financial Supervisory Service started an enquiry into whether Hwang had offered bribes to officials at the National Agriculture Cooperative Federation and state-run Korea Train Express. The NACF is alleged to have entered an exclusive contract with state-run Korea Train Express outside of their regulatory boundaries in which KTX allowed the NACF to manage its derivative positions, which were then sold through to such brokers as Deutsche Bank. Officials at the NACF and KTX declined comment.

The case has been referred to local prosecutors, who have indicted 10 people including Hwang.

Prosecutors allege Hwang received a kickback from two consulting firms in return for helping arrange derivative transactions totaling USD1 billion for KTX via NACF, according to the Korea Times, one of the country's main English-language newspapers.

The NACF is alleged to have profited on the transactions and gave money to the consulting firms, which then forwarded a portion to Deutsche Bank's Hwang, noted the newspaper. Hwang is alleged to have shared the money personally with officials at KTX and the NACF.

The FSS told DW a regularly scheduled audit at the German bank will take place in the coming days, though one official added the sweep has taken greater significance due to the recent scandal. Dong Soon Park, an official at the banking examination department 2 at the FSS in Seoul, said if evidence that other Deutsche Bank employees are also involved comes to light the bank could be penalized, "It is possible that they will be fined." The FSS will also fine-tune and change some of its criteria for derivative transactions over the coming months, he said, declining to elaborate.

Deutsche Bank is likely in the clear, market officials said, but the affair could hit the firm's reputation and market standing. In a recent survey by the FSS, Deutsche Bank was ranked as the most profitable derivatives house in Korea for the first half of the year. West declined comment on the impact on Deutsche Bank's reputation.  

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