Fixed Income Disclosures (Terms and conditions of Fixed Income Dealing)
Deutsche Bank AG and its branches and affiliates (together, “Deutsche Bank”) are active in fixed income markets for a wide range of products, including securities, foreign exchange, swaps, other derivatives and the secondary loan market. Deutsche Bank wishes to ensure that our counterparties have an understanding of our course of dealing in these products. It is important that you read this disclosure to understand how we may trade in relation to your orders, requests for quotation (“RFQ”), trade instructions, or other expressions of interest in fixed income products (collectively “trade requests”).
This document sets out our standard business practices and terms and conditions of dealing with our fixed income customers and establishes the basis on which we can provide our customers with pricing and execution of their trade requests. Further terms specific to foreign exchange products are addressed in Deutsche Bank’s “Foreign Exchange Disclosures (Terms and conditions of FX Dealing).” Cash equities, equity derivatives, exchange traded funds or similar securities, and listed derivatives traded on an agency basis are not addressed in this disclosure.
In accordance with our dedication to upholding a high level of integrity, Deutsche Bank’s course of dealing is in all cases intended to be carried out in compliance with all applicable laws and regulations and with our internal policies and procedures in furtherance of these laws and regulations.
I. Principal trading
Deutsche Bank typically acts in a principal capacity in fixed income markets. Deutsche Bank acts on an arm’s length basis and does not act as agent, fiduciary, or advisor or in any similar capacity or undertake any of the duties that an entity acting in any such capacity ordinarily would perform, unless expressly agreed, and then only where we act with discretion in execution or where there is a specific regulatory obligation.
Each counterparty is expected to independently evaluate the appropriateness and suitability of any transaction that it is considering based on its own, objectives and circumstances and its independent assessment of the transaction’s merits.
Therefore, statements from Deutsche Bank should not be construed as recommendations or financial or investment advice (within the definitions set out in Directive 2014/65/EU (“MiFID II”)), or as an inducement or offer, invitation or solicitation of securities, transactions or other financial products which can be accepted by you without further action from Deutsche Bank.
Deutsche Bank does not take orders in fixed income markets, except in limited instances for certain product classes. When Deutsche Bank agrees to work a counterparty’s order, we are only indicating a willingness to attempt to enter into the trade requested by the counterparty and are not obliged to enter into any transaction or guaranteeing the full or partial execution of such order.
We will exercise our discretion in deciding whether to work the order, which orders we are willing to execute and when and how to execute all or any part of an order. When Deutsche Bank agrees to work an order over a period of time or otherwise to accept an order involving the exercise of discretion, Deutsche Bank will endeavour to exercise this discretion reasonably and fairly, but, unless otherwise agreed, Deutsche Bank is not committed to executing all or any part of the order in any particular way.
II. Market making
a. Risk management and hedging activities; conflicts
Deutsche Bank is a market maker in fixed income products and as such may provide liquidity to multiple counterparties at the same time. As a result, Deutsche Bank may need to consider competing interests in executing its counterparties’ trade requests. Deutsche Bank may trade prior to or alongside a counterparty’s transaction in order to facilitate execution with other counterparties, to manage risk, to source liquidity and for other reasons.
Deutsche Bank may hedge any exposure that would be created by a transaction prior to the execution of that transaction (sometimes referred to as “pre-hedging”). We may also choose to leave a position unhedged or partially hedged. Any profit or loss resulting from such trading will accrue to Deutsche Bank.
Where Deutsche Bank engages in pre-hedging the following key principles apply:
- (i) Deutsche Bank expects to take on market risk associated with such activity and such activity is undertaken at Deutsche Bank’s own risk;
- (ii) Deutsche Bank will seek to ensure any such activity is reasonable relative to the size and nature of the anticipated transaction (or portfolio of transactions) taking into account prevailing market conditions (such as liquidity);
- (iii) Deutsche Bank’s aim prior to commencing any such activity will be to minimise the impact of the activity on the market and to facilitate the transaction (or portfolio of transactions);
- (iv) pre-hedging will be designed with the intention to benefit the relevant counterparty or counterparties (e.g. with the aim of improving Deutsche Bank’s pricing) and executed in a manner that is not intended to disadvantage the relevant counterparty or counterparties; and
- (v) pre-hedging may take place at a portfolio level or otherwise than on an individual transaction or individual client basis.
In general, these market-making and hedging activities can have an impact on transaction pricing, timing and the availability of liquidity at levels necessary to execute transactions with counterparties. They can also trigger, or delay, or prevent the trigger of, take profit or stop loss or other limit orders and contractual barriers, such as knock-outs or knock-ins, affecting the value of a transaction to a counterparty.
We may establish, adjust or unwind any hedge from time to time in our discretion, including before the time for determination of a benchmark, fixing rate, or barrier or stop level which is a term of any of your transactions. Our hedging strategy may involve greater and more frequent dynamic adjustments as market prices approach a benchmark, fixing rate, or stop or barrier level.
Deutsche Bank may seek to satisfy the requests of its counterparties alongside its independent risk management objectives, and it retains discretion with respect to how to satisfy the trade requests of its counterparties, including with respect to execution, aggregation, priority and pricing. Deutsche Bank may possess material non-public information relating thereto, which may impact the price of your transactions, the timing of execution and/or the amount of your fill.
Any bid or offer price or other price-forming parameter quoted by Deutsche Bank, as well as the level at which we execute any transaction with you, will, unless expressly agreed otherwise, incorporate what we determine to be an appropriate bid-ask spread or markup above the price at which Deutsche Bank may be able to transact, or has transacted, with other counterparties, in order to generate an appropriate return for Deutsche Bank as compensation for its activities.
Deutsche Bank is not under any obligation to disclose the specific amount of any bid-ask spread and/or mark-up to a counterparty (unless otherwise agreed in writing or required by law).
Deutsche Bank has discretion to offer different prices or services to different counterparties, or to the same counterparty, for the same or substantially similar transactions.
In determining any markup or spread applicable for a particular transaction, we may consider factors such as liquidity of the transaction type in prevailing markets, the size and/or complexity of the transaction, credit risk, counterparty risk, maturity, balance sheet and capital usage, risk limit utilisation, trade processing costs, sales efforts, hedging costs, hedge effectiveness and any other relevant considerations. Deutsche Bank may also be compensated in the form of an agreed fee.
In executing transactions, Deutsche Bank may look for market opportunities that satisfy both a price where we can execute a counterparty’s trade request and earn an appropriate return for that activity, including while managing and prioritising other interests, positions and executions for Deutsche Bank and other counterparties.
If we execute a trade with you through liquidity sourced from another counterparty, we may also receive additional compensation on, and fees for, the trade we execute with our other counterparty.
Deutsche Bank may also benefit from reduced transaction costs when executing through certain internal or external trading venues and, if we have an investment in, or other relationship with, an external venue, Deutsche Bank may receive other benefits as a result of that interest. Deutsche Bank is not obliged to disclose to a counterparty the amount of compensation, fees or other benefits received in connection with any transaction (unless otherwise agreed in writing or required by law).
c. Liquidity Sourcing
Deutsche Bank may enter into transactions through internal sources of liquidity, or externally in the market, in order to execute your transaction and offset the risk incurred. Deutsche Bank reserves the right to execute a transaction with you using Deutsche Bank’s inventory or through acquisition or other hedging activities without disclosing to you the source or cost of the liquidity.
Execution of a transaction with a counterparty does not mean that Deutsche Bank held or acquired inventory to complete the transaction, or that there exists any given quantity or quality of liquidity in the market at the execution level.
As discussed below under the heading “Electronic execution tools,” in certain markets, such as foreign exchange, U.S. Treasuries and other sovereign bonds, Deutsche Bank may utilise internally developed electronic tools to access both external and internal sources of liquidity in order to provide what we deem to be the appropriate bids and offers, and executions, reasonably available under the circumstances.
These tools may include algorithms, internalisation engines and/or smart order routers, such that all or part of a transaction may be executed on the basis of pricing from various external liquidity sources, including certain trading venues that electronically provide information to us regarding their available and accessible liquidity.
III. Execution of trade requests
Unless expressly agreed otherwise, Deutsche Bank’s prices are indicative only. A transaction shall only be treated as having been executed at the time when Deutsche Bank accepts a counterparty’s trade request (which constitutes an offer to enter into a transaction with Deutsche Bank), which may be prior to receipt of communication by a counterparty in relation to the relevant transaction.
Deutsche Bank may in its sole discretion accept or reject any offer to enter into a transaction for any reason, including the expiration or withdrawal of an indicated price or if Deutsche Bank determines that there is not sufficient liquidity in the market to execute at that price.
We are not generally obligated to disclose to you why we were unable to execute your trade request or why we accepted or rejected your offer.
If we execute a trade request, the costs or benefits of any price changes arising from any risk management practices in connection with such execution may, in our discretion, be retained by us or passed on to you.
If a transaction is executed “at market,” “at latest” or on similar terms, it will be executed at Deutsche Bank’s then-current bid or offer for that particular counterparty at the time of execution (with application of an appropriate spread or mark-up as discussed above), such that the counterparty is exposed to market movements between the time at which its trade instruction was submitted and the time at which the resulting transaction is executed.
a. Electronic trading
When a counterparty transmits a trade request to Deutsche Bank on any electronic platform (including any platform operated by a third party), Deutsche Bank shall follow the procedures agreed with the counterparty (such as those sent out in this document and any agreement or terms for electronic trading) and, where not conflicting, those applicable to the relevant execution method and platform.
As part of the trade acceptance process operated by Deutsche Bank, we may apply a number of risk management and operational controls automatically before a trade request is accepted or rejected (such as a price check, limits on counterparty exposure, credit checks, permissioning of instruments, and other controls). At Deutsche Bank these controls employed prior to trade acceptance are referred to collectively as “last look”.
The price check feature of last look is a control that is used to identify whether a counterparty’s trade request is made at a price that, at the moment of the trade acceptance decision, is within Deutsche Bank’s price tolerance for execution for that counterparty. This control may be applied immediately upon receipt of a submitted trade request and after application of all other last look checks, or after a short delay.
In each case, Deutsche Bank compares the price for the relevant instrument included in the counterparty’s trade request with the price at which Deutsche Bank calculates that it is willing to trade with that counterparty, based on then-current market information (the “refreshed price.”) If the price check shows that the refreshed price has moved relative to the price included in the counterparty’s trade request by more than the relevant price tolerance for that counterparty, Deutsche Bank will reject the trade request. Otherwise, subject to other controls and the agreement between us, Deutsche Bank will accept the trade request.
Changes to pricing during the period of operation of the price check control may affect whether a trade request is accepted or rejected.
The default setting by which Deutsche Bank operates the price check control is to reject trade requests when price has moved during the period of delay against Deutsche Bank (rather than when price movements have gone in its favour), in excess of the relevant price tolerance. This setting is sometimes referred to as “asymmetric”.
Deutsche Bank employs an “asymmetric” setting by default because it believes, in general, that this allows Deutsche Bank to provide a deeper, more consistent liquidity offering, at tighter pricing and higher fill rates than it otherwise could. The application of an asymmetric setting may result in a lower proportion of trades being accepted where the price moves against Deutsche Bank during the period of delay than where the price moves in its favour.
In some locations or with respect to certain products or electronic platforms Deutsche Bank may change the default setting from time to time without notice. This may result in Deutsche Bank rejecting trades when a price movement during the period of delay exceeds the relevant tolerance for that counterparty, regardless of whether the price moves in favour of or against Deutsche Bank on that trade request. This may result in a lower overall trade acceptance rate and/or a wider spread of prices provided to the counterparty.
The application of the price check feature of last look allows Deutsche Bank to manage the risk posed by technological anomalies and latencies as well as to protect itself from certain adverse trading behaviours and market conditions.
The price provided by Deutsche Bank, the proportion of trade requests that are rejected, the extent of any short delay applied and the potential withdrawal of previously displayed prices are reviewed periodically by Deutsche Bank and may depend upon factors applicable to the counterparty and its trading preferences as well as Deutsche Bank’s overall risk tolerance. The factors applicable to one counterparty may differ from those applicable to other counterparties and may lead to differences in pricing, duration of delay and acceptance rates among counterparties.
b. Market disruption
In periods of extreme market volatility and/or disruption, Deutsche Bank has on some occasions seen delays to trades, including acceptance and execution of trade requests, pricing, price streaming and/or market data dissemination. Further, Deutsche Bank’s provision of pricing is subject to internal procedures and controls in relation to system or other issues which may disrupt the ability of Deutsche Bank’s system to provide accurate and/or up to date pricing.
Deutsche Bank is not obligated to provide pricing, price streaming or accept trade requests and all determinations of if, whether or when market criteria have been met for execution shall be made by us in our sole discretion.
Consistent with market practice, Deutsche Bank’s electronic trading platforms have position limits, volatility and other controls, that in each case may temporarily suspend execution, pricing and price streaming. It is possible that different counterparties submitting trade requests with similar profiles may achieve different outcomes, including whether and when such trade requests will be executed.
During volatile and/or disrupted markets, we will endeavour to continue to serve counterparties but we may not be able to provide the product offering, level of execution, liquidity and pricing – including in electronic markets – as would be the case under more normal market conditions.
c. Electronic execution tools
Deutsche Bank may elect to execute trade requests by means of algorithms, internalisation engines and/or other electronic execution tools (collectively, “execution tools”). In all cases, the applicable execution tool will seek to execute according to a predetermined methodology for the relevant execution tool, which may or may not be determined by Deutsche Bank.
The use of an execution tool in relation to a counterparty’s trade request does not guarantee any particular outcome and/or execution of any amount requested. The results obtained from any execution tool may depend on the validity of the assumptions underlying it and prevailing market conditions that may impact these assumptions.
The execution methodology utilised in relation to a particular execution tool does not guarantee execution of any part or all of a trade request.
Deutsche Bank may also elect to offset the risk of any transactions through an execution venue that is not operated by Deutsche Bank, and execution tools may be used to determine any such election.
d. Bids wanted in competition
Deutsche Bank may respond to a counterparty request to submit bids to purchase one or more tradable instruments at a set date and time, sometimes along with other dealers (a “bid wanted in competition,” or “BWIC”). Deutsche Bank always acts as principal in BWIC’s and not as agent of the requesting counterparty, nor as agent for any third party it may solicit for bids.
Deutsche Bank is under no obligation to solicit bids from such third parties or to submit a bid based on them to the requesting counterparty. Any such bids received from third parties will be deemed to be “Pay on Top”, unless such party provides an “all-in” bid. Deutsche Bank may cease participation in a BWIC with or without notice, and, if it submits an unsuccessful bid, may disclose the cover bid to third parties that it solicits.
IV. Large Trades
From time to time a counterparty or Deutsche Bank may propose to enter into a transaction or set of transactions, which is, or together are, substantially larger than the observed liquidity in the relevant product market around the time of execution, and which could be reasonably expected to have a material impact on prices in the market or related markets (a “Large Trade”). This is a relative, rather than absolute, concept.
In relation to any Large Trade:
- (i) Deutsche Bank and a counterparty may discuss execution strategy, for example timing or potential market impact of the transaction;
- (ii) Deutsche Bank and a counterparty may propose steps designed to manage confidential information flows related to the Large Trade;
- (iii) Deutsche Bank and/or a counterparty may discuss market performance, for example where the market performs or may perform in an unexpected manner; and
- (iv) notwithstanding any discussion of the matters outlined in (i)-(iii) above, each of Deutsche Bank and the counterparty will act as a principal, not as an agent, fiduciary or in any advisory capacity for any Large Trade.
Counterparties should note that the execution, or risk management, of a Large Trade may have an impact on the market which affects the price of any instrument traded by the customer (including the Large Trade and any other transaction with Deutsche Bank or a third party) and that past performance, pricing, observed liquidity or other variables immediately prior to making a trade request for a Large Trade is no guarantee of future outcomes with respect to such variables. It is possible that the market behaves in an unexpected manner in relation to the execution and/or risk management of a Large Trade. These factors could have a material impact on the effective cost a counterparty incurs in relation to any Large Trade or other transactions it enters into from time to time.
Given that (A) counterparties may be regular participants in financial markets and have their own views on these topics; (B) counterparties may not wish to discuss their views on these topics with Deutsche Bank; (C) counterparties may choose to execute through channels with no or little human interaction trade by trade; and (D) the concept of a Large Trade is relative, a majority of Large Trades may be executed without any such discussions. If a counterparty contemplates that the transaction or set of transactions it is proposing to enter with Deutsche Bank may constitute a Large Trade it should seek to initiate a pro-active discussion on these matters with its Deutsche Bank contacts if it would like to discuss these matters further.
Benchmark rates, or fixes, may be compiled by a benchmark administrator from live trade data, comprised of either tradeable quotes or traded transaction prices sourced from specific trading venues during a specified determination period known as the fixing window. A contribution to such a benchmark is sometimes referred to as a passive submission to the benchmark.
Benchmark rates may also be published by central banks, or compiled from dealer surveys, either in the ordinary course or as a fall back in the event that the ordinary course source for the benchmark rate is not available. Deutsche Bank may participate in dealer surveys.
In the event that Deutsche Bank both acts as a submitter and transacts in relation to a benchmark, Deutsche Bank has established controls reasonably designed to mitigate or avoid potential conflicts of interest.
Transactions whose pricing is set by reference to a benchmark give rise to particular risk management concerns because Deutsche Bank, as a market maker, will be obligated to execute at a price that is not known at the time of trade.
Risk management practices and Deutsche Bank’s other ordinary course activities (including sourcing liquidity for other customer orders that are unrelated to a benchmark fixing, or acting as a market maker or engaging in risk management activities) will often result in the execution of hedging transactions before and during the fixing window, which may impact the ultimate benchmark fixing and may also impact pricing, volume and volatility in related markets.
VI. Customer information
Protecting the confidentiality and security of customer information is an important part of how Deutsche Bank conducts its business. Deutsche Bank has reasonable controls that are designed to protect a customer’s confidential information. However, counterparties should understand that Deutsche Bank does make use of some information contained in trade requests in order to facilitate the execution of and risk manage the transactions themselves.
Specifically, Deutsche Bank may use the economic terms of a trade request (but not the counterparty’s identity) to test liquidity and/or execute trades with one or more third parties (including interdealer brokers) in order to source liquidity.
Deutsche Bank may also use the economic terms of various transactions (including factors relating to market, liquidity and credit risk) on a portfolio, individual trade or other basis to evaluate and execute risk-mitigating transactions. To facilitate this activity, subject to internal controls and compliance with applicable law and regulation, Deutsche Bank may internally share economic terms relating to a transaction with persons acting in a sales or trading capacity for Deutsche Bank (or one of its agents).
Deutsche Bank may also use economic information in its pricing methodology, as long as such usage is not designed or intended to disadvantage a customer.
Deutsche Bank analyses transaction data on an individual and aggregate basis for a variety of purposes, including counterparty risk management, sales coverage, and customer relationship management, to inform its overall market views and pricing and to tailor the provision of products and services to counterparties. Deutsche Bank may introduce such data to a third party vendor in an aggregated form for the purposes of benchmarking its performance.
In addition, Deutsche Bank may analyse, comment on and disseminate aggregated and anonymized information regarding executed transaction, as well as unexecuted orders or transaction instructions (other than market orders and trade requests subject to last look controls), together with other available information regarding various markets, internally and (with potential categorization as to product, geography and/or industry) to its customers as part of its general market commentary and trade ideas.
In particular Deutsche Bank may provide market colour, which can be any view or commentary. Market colour is not intended as research and is not objective or independent, and may not be subject to the same controls as research. Market colour is not a recommendation and does not constitute financial or investment advice and should not be relied on as such by clients.
All information provided to a customer by Deutsche Bank (unless already in the public domain) should be treated as confidential and should not be disclosed by a customer to any third party.
Please note that Deutsche Bank has regulatory and other duties to supervise and control its business. Deutsche Bank shares information as necessary to fulfil these responsibilities and respond to general and specific regulatory and other requests with which it is required to comply.
VII. Primary Dealer – Bond Auction Transactions
a) Reference Price Transactions
When transacting with you, based on the ‘agreed published auction rate’ as a Reference Price Transaction, Deutsche Bank will be taking on a risk position and is exposed to the level of the ‘agreed published auction rate’, which is unknown at the time of trade.
In order to hedge this risk, to hedge other risks within the firm, to obtain liquidity, to hedge other client transactions, and in accordance with its obligations as a Primary Dealer, Deutsche Bank is likely to be bidding in the auction for its own account. It may enter such hedging transactions with other counterparties before, and at, the time at which the auction is run and auction prices are determined.
Deutsche Bank will transact at prices that may be different to the ‘agreed published auction rate’, and may incur a profit or loss through doing so. Any profit or loss resulting from such trading will accrue to Deutsche Bank. These market-making and hedging activities may also affect ‘agreed published auction rate’, and volume and volatility in related markets.
b) Fixed Price Orders
When transacting with you in the auction Deutsche Bank AG (and its branches and affiliates (together “Deutsche Bank”) as a primary dealer, acts in a principal capacity and does not act as an agent, fiduciary or in any similar capacity.
When you submit your fixed price order, Deutsche Bank, as a primary dealer in the auction, will enter this fixed price order into the auction system. Your order may or may not be filled, in full or in part, in the auction. Your order is only filled by the allocation received against it in the auction. Deutsche Bank cannot guarantee an allocation for your order and it does not exercise any discretion as to the price or size of the allocation or whether the order is filled.
As a primary dealer in the auction, Deutsche Bank has a number of competing interests which could give rise to potential conflicts of interest between Deutsche Bank and its clients. When transacting with you, Deutsche Bank will most likely be bidding in the auction: to facilitate other client orders, to fulfil its obligations as a primary dealer in the auction (i.e. adhering to a minimum participation levels) and for its own account. In doing so, it may be taking on risk positions.
In order to hedge these risks, to hedge other risks within the firm, to obtain liquidity and to hedge other client transactions, it may enter such hedging transactions with other counterparties prior to, and at the time at which the auction is run and auction prices are determined. In its role as a primary dealer, Deutsche Bank may also be active in the secondary market prior to, during, and immediately after an auction.
This hedging and secondary market trading activity may impact the price of the instrument which is to be auctioned, potentially to the detriment of a client.