Gross versus net, and the control that catches it

Graduate · enrolled learners

This lesson opens with The Deutsche Bank fat finger, March 2018.

What happened

On 16 March 2018, during a routine daily collateral adjustment, Deutsche Bank mistakenly sent about 28 billion euros, roughly 35 billion dollars, from its principal accounts to its account at the Eurex clearing house, a sum far larger than it was due to post and larger than the bank's own market value of about 24 billion euros. The bank called it an operational error in the movement of collateral and has not said how much it meant to send or what made the figure so large. A fail-safe it had built for exactly this, a check known internally as a bear trap, set up after an earlier collateral payments error in March 2014, should have caught the transfer, according to a person familiar with the matter, and did not; the payment simply went out. The bank said the error was identified within minutes and rectified, so there was no lasting loss, but the mistake exposed the gap plainly: a system had sent an amount that should have been impossible for that process, and only a quick catch prevented harm. The number that left the bank was not wrong by a plausible margin; it was wrong by orders of magnitude, and nothing had been in place to say that an amount that size could not be right.

The decision point

An error in a routine transfer, a gross-versus-net mix-up being the classic example, can push an action orders of magnitude larger than intended, and the defense is a pre-send control, a limit or sanity check that catches an oversized or impossible action before it leaves the system, and that actually fires. Deutsche Bank is the case: a routine collateral adjustment sent about 35 billion dollars, far more than the bank was due to post, and the fail-safe built to stop such a transfer did not; only a catch within minutes prevented lasting harm. The lesson is that the size of an action is itself a signal, and a control that knows the plausible bounds of a process, what a normal net transfer looks like, what the maximum could ever be, can catch a value that is wrong by orders of magnitude, which is exactly the kind of error a gross-for-net mistake produces. This is the outbound counterpart to reconciliation: reconciliation checks what the system did against reality, and a pre-send control checks what the system is about to do against the bounds of the possible, refusing to send an amount that could not be right. So the discipline is to build limits and sanity checks on outbound actions, sized to what each process should ever produce, so an oversized or impossible transfer is stopped before it leaves rather than caught, if you are lucky, afterward, because Deutsche Bank was saved by a quick reversal it had no right to count on, and the number that briefly left the bank, 35 billion dollars from a routine process, was one its control had been built to stop and did not.

Orientation and Year One are open: anyone can read them without an account. From Year Two onward the lessons are for enrolled learners, because progress through the later years only means anything if it is tracked against a record.

It is free. We do not sell the list and there is nothing to buy at the end of it.