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2012-12-07 — dealbreaker.com

``[T]he bank had at one point used a model but found it came up with "economically unfeasible" outcomes. Instead, it used two other measures. First, a 15 per cent "haircut" on the value of the trades ... In 2008, during the crisis, instead of increasing the haircut, the bank scrapped it. The gap risk was now supposed to be covered by a reserve. The complainants say that the total of reserves held by the credit correlation desk was just $1bn-$2bn, which was supposed to cover all risks, not just the gap option. ... Then, in October 2008, ... Deutsche stopped any attempt to model, haircut or reserve for the gap option but says that the company took that action because of market disruption during the financial crisis. ... At this time, to account for the gap risk, the bank hedged it by buying S&P "put" options.''

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