Deutsche quits precious metals trade

Deutsche Bank is pulling out of trading in precious metals, completing the German bank’s retreat from buying and selling physical commodities after being investigated for alleged abuse.

Under pressure from regulators and declining profitability, several banks are shrinking or disposing of their businesses in commodities trading, including JPMorgan Chase, Barclays, Morgan Stanley, UBS and Royal Bank of Scotland.

“Following on from last year’s decision to exit most of physical commodities, Deutsche Bank’s corporate banking and securities business is reducing its physical commodities business by winding down its physical precious metals trading operations,” the bank said.

“Our financial derivative offering for precious metals remains unchanged.”

Banks have faced a volley of criticism from regulators about their commodity trading activities. The US Federal Reserve last week announced plans for a rule that could limit banks’ ability to handle physical commodities such as oil and natural gas after a report by the US Senate subcommittee on investigations raised concerns about their commodities activities and urged regulators to clamp down.

Deutsche itself has come in for scrutiny in this area. BaFin, the German regulator, sent the bank a letter in April telling it that it had found faults in the lender’s internal controls surrounding the reporting of commodity prices.

BaFin’s move comes as regulators scrutinise a string of financial reference rates including the gold price after global investigations into Libor and foreign exchange rates uncovered evidence of attempted market rigging by a large number of institutions.

The development comes almost a year after Deutsche announced it was scaling back its commodities arm – exiting most of the business except for precious metals – amid increased regulatory and capital costs.

The retreat is being driven by tighter regulation, fresh capital constraints and lower profitability. Coalition, a consultancy, estimates the revenues of the top 10 banks in commodities fell last year to $4.5bn from a record $14.1bn in 2008.

Deutsche Bank said it would continue to operate some precious metal activities in its storage facilities, ETF investment products and financial derivatives. It said the precious metals trading arm being shut had fewer than five employees in London.

BaFin is carrying out a separate investigation into whether the Frankfurt-based bank manipulated the gold and silver price. The bank has also been ordered to conduct its own investigation into whether manipulation of precious metals prices took place.

Deutsche put its seat in the daily gold and silver price fixing in London up for sale in January, and announced it would withdraw from both seats in April after failing to find buyers. The banks operating the twice-daily gold fix announced this year it would be replaced by an electronic system operated by Intercontinental Exchange.

Deutsche also said last week it would stop trading most credit default swaps tied to individual companies, a trade which has also been made less attractive by regulation.