ABUSE OF STRUCTURED FINANCIAL PRODUCTS- Misusing Basket Options to Avoid Taxes and Leverage Limits MAJORITY AND MINORITY STAFF REPORT

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(ii) Journaling Between Deutsche Bank Option Subaccounts
From 1998 to 2008, in the old MAPS system, Deutsche Bank pooled all of the assets
purchased through multiple basket options and hired RenTec as the investment advisor for the
account containing all of those assets. RenTec told the Subcommittee that the same account
simultaneously served as the bank’s hedge for all of the outstanding options. 350 In 2008, as part
of Deutsche Bank’s restructuring of the MAPS option, Deutsche Bank created a new system that
purported to divide up the holdings for each separate option and assign the assets for each option
to a separate subaccount. At the same time, the new system continued using a single proprietary
trading account that contained all of the option assets. Despite continued use of that pooled
account, RenTec told the Subcommittee that the new subaccounts ensured specific assets
individually corresponded to and hedged each option separately. 351 Both Deutsche Bank and
RenTec explained that the new system also “resolved ambiguity” relating to how an individual
option could be liquidated in the event of the option breaching its barrier, because with
subaccounts, it would be clear what assets to liquidate. 352
At the same time, as part of the new system, Deutsche Bank allowed RenTec to “journal”
assets between different subaccounts. 353 A “journal” in this context is the ability to transfer a
stock position from one subaccount to another, using book entries for the two accounts to
accomplish the transfer, without the need to sell the position to the market and then immediately
buy it back. 354 According to both Thomas Kerns and Eamon McCooey, who managed
operations for Deutsche Bank’s updated MAPS system at different times, this kind of transfer
would have been problematic if it had been conducted through the market, since selling and
repurchasing identical securities could have been misinterpreted as “wash sales” or some other
type of manipulative trading. 355
RenTec completely controlled the journaling process through its authority to determine
what assets could be included in a particular option account. According to RenTec, it used
journaling for “Portfolio rebalancing due to Option Exercise,” meaning to “reallocate the
positions in the sub-account underlying the exercised option to the remaining options based on
their relative cash settlement amounts.” 356 Peter Brown, co-CEO of RenTec, explained to the
Subcommittee that the journaling process was important, because it assisted RenTec with loss
350 7/31/13 letter from RenTec to the Subcommittee describing journaling between basket option sub-accounts, RT-
PSI-00384749-761.
351 Id.
352 Subcommittee interviews of Satish Ramakrishna, Deutsche Bank (5/16/2014) and Jonathan Mayers, RenTec
(5/28/2014).
353 For a list of all journaling between subaccounts, see 7/31/13 letter from RenTec to the Subcommittee describing
journaling between subaccounts, RT-PSI-00384749-761.
354 Id. See also Subcommittee interview of Eamon McCooey, Deutsche Bank (5/2/2014).
355 Subcommittee interviews of Eamon McCooey, Deutsche Bank (5/2/2014), Thomas Kerns, RenTec (5/6/2014),
and Peter Brophy, Deutsche Bank and RenTec (5/13/2014 and 5/19/2014). RenTec told the Subcommittee that it
was irrelevant whether its “recommendation” to remove a position from a subaccount resulted in a journal or a sale
to the market. 8/30/2013 email from RenTec’s outside legal counsel to the Subcommittee, “per our discussion,”
PSI-RenaissanceTech-20-000001-002, at 002. This position appears to be inconsistent, however, with RenTec’s
explanation for why it preferred journaling over asset sales when moving assets from one MAPS account to another.
356 5/15/2008 “Deutsche Bank Maps New Process/Procedures,” prepared by RenTec, RT-PSI-00002319-2322 at
321.