Study: Deutsche Bank: The Cost of Legacy Systems Deutsche Bank AG, founded in 1870, is one of the worlds top financial companies, with 2,790 branches in 70 countries. It offers a range of financial products and services, including retail and commercial banking, foreign exchange, and services for mergers and acquisitions. The bank provides products for mortgages, consumer finance, credit cards, life insurance, and corporate pension plans; financing for international trade; and customized wealth management services for wealthy private clients. Deutsche Bank is also the largest bank in Germany, with 1,845 retail branch locations, and plays a central role in German economic life. In many ways, Deutsche Bank is the embodiment of the global financial system. Deutsche has the worlds largest portfolio of derivatives, valued at around $46 trillion. A financial derivative is a contract between two or more parties whose value is dependent upon or derived from one or more underlying assets, such as stocks, bonds, commodities, currencies, and interest rates. Although Deutsche Bank had survived the 2008 banking crisis, which was partly triggered by flawed derivatives, it is now struggling with seismic changes in the banking industry, including recent regulatory change and fears of a global economic downturn. The bank was forced to pay $7.2 billion to resolve U.S. regulator complaints about its sale of toxic mortgage securities that contributed to the 2008 financial crisis. In addition, the Commodity Futures Trading Commission (CTFC) complained that Deutsche Bank submitted incomplete and untimely credit default swap data, failed to properly supervise employees responsible for swap data reporting, and lacked an adequate business continuity and disaster recovery plan. A credit default swap is a type of credit insurance contract in which an insurer promises to compensate an insured party (such as a bank) for losses incurred when a debtor (such as a corporation) defaults on a debt and which can be purchased or sold by either party on the financial market. Credit default swaps are very complex financial instruments. Deutsche Bank is in trouble with U.S. regulators for its inability to fulfill swap reporting requirements under the Commodity Exchange Act and CFTC Regulations. The CFTC complained that on April 16, 2016, Deutsche Banks swap data reporting system experienced a system outage that prevented Deutsche Bank from reporting any swap data for multiple asset classes for approximately five days. Deutsche Banks subsequent efforts to end the system outage repeatedly exacerbated existing reporting problems and led to the discovery and creation of new reporting problems, for example, Deutsche Banks swap data reported before and after the system outage revealed persistent problems with the integrity of certain data fields, including numerous invalid legal entity identifiers. (A Legal Entity Identifier [LEI] is an identification code to uniquely identify all legal entities that are parties to financial transactions.) The CFTC complaint alleged that a number of these reporting problems persist today, affecting market data that is made available to the public as well as data that is used by the CFTC to evaluate systemic risk throughout the swaps markets. The CFTC complaint also alleged that Deutsche Banks system outage and subsequent reporting problems occurred in part because Deutsche Bank failed to have an adequate business continuity and disaster recovery plan and other appropriate supervisory systems in place. 2 In addition to incurring high costs associated with coping with regulators and paying fines, Deutsche Bank was a very unwieldy and expensive bank to operate. The U.S. regulators have pointed out Deutsche Banks antiquated technology as one reason why the bank was not always able to provide the correct information for running its business properly and responding to regulators. Poor information systems may have even contributed to the financial crisis. Banks often had trouble untangling the complex financial products they had bought and sold to determine their underlying value. Banks, including Deutsche Bank, are intensive users of information technology and they rely on technology to spot misconduct. If Deutsche Bank was such an important player in the German and world financial systems, why were its systems not up to the job? It turns out that Deutsche Bank, like other leading global financial companies, had undergone decades of mergers and expansion. When these banks merged or acquired other financial companies, they often did not make the requisite (and often far-reaching) changes to integrate their information systems with those of their acquisitions. The effort and costs required for this integration, including coordination across many management teams, were too great. So the banks left many old systems in place to handle the workload for each of their businesses. This created what experts call spaghetti balls of overlapping and often incompatible technology platforms and software programs. These antiquated legacy systems were designed to handle large numbers of transactions and sums of money, but they were not well suited to managing large bank operations. They often did not allow information to be shared easily among departments or provide senior management with a coherent overview of bank operations. Deutsche Bank had more than one hundred different booking systems for trades in London alone, and no common set of codes for identifying clients in each of these systems. Each of these systems might use a different number or code for identifying the same client, so it would be extremely difficult or impossible to show how the same client was treated in all of these systems. Individual teams and traders each had their own incompatible platforms. The bank had employed a deliberate strategy of pitting teams against each other to spur them on, but this further encouraged the use of different systems because competing traders and teams were reluctant to share their data. Yet the Bank ultimately had to reconcile the data from these disparate systems, often by hand, before trades could be processed and recorded. This situation has made it very difficult for banks to undertake ambitious technology projects for the systems that they need today or to comply with regulatory requirements. U.S. regulators criticized Deutsche Bank for its inability to provide essential information because of its antiquated technology. Regulators are demanding that financial institutions improve the way they manage risk. The banks are under pressure to make their aging computer systems comply, but the IT infrastructures at many traditional financial institutions are failing to keep up with these regulatory pressures as well as changing consumer expectations. Deutsche Bank and its peers