The Financial Services Commission (FSC) said it had also decided to take five Deutsche employees to prosecutors for investigation, as they made 45 billion won ($40.1 million) of improper profit by manipulating the stock market to make their derivatives positions profitable.
The decision was made at the Financial Services Commission's regular bi-weekly meeting on Wednesday.
"Three Deutsche employees in New York, Hong Kong and Seoul collaborated to make their derivatives position profitable... and engaged in market manipulation on Nov. 11," the FSC said in a statement.
Deutsche said it was "disappointed" by the decision but would continue to cooperate with Korean authorities.
"Deutsche Bank will continue to cooperate with the Korean authorities in relation to the investigation of this matter ... Deutsche Securities Korea (DSK) regrets sanctions imposed by the FSC (Financial Services Commission) and the referrals of DSK and employees are very regrettable," the bank said in a statement.
The suspension of operations including derivatives trades and some proprietary deals, which Korean regulators often impose to penalize financial irregularities, may not pose severe financial damages, but it could tarnish the German bank's reputation.
"It's not possible to determine exactly what impact this will have on Deutsche Bank's earnings yet but it's not good for Deutsche Bank because it wanted to expand in South Korea, which is an important market for it," said Konrad Becker, an analyst at Merck Finck & Co. in Frankfurt.
"It could also damage Deutsche's image and therefore impair its other businesses in South Korea."
The suspension will take effect from April 1 to Sept. 30.
"We could not find out whether Deutsche's head office is also directly engaged in the case," Choi Gyu-yeon, a FSC senior official, told a news briefing, adding that the prosecutors will decide on whether to investigate the German bank's headquarters.
Korea has been investigating whether Deutsche Bank's local and Hong Kong operation caused a stock market plunge on Nov. 11 through improper trades, as a massive sell-order from the company led the market's near 3 percent fall at the last minute.
Record foreign selling on Nov. 11, including a 2.3 trillion won ($2.1 billion) sale from Deutsche accounts minutes before the market closed, led to a 53-point drop in the KOSPI amid options expiry.
The move on Wednesday comes as South Korea seeks to stabilize its gyrating financial markets with a series of measures such as capital controls and tougher derivatives trade rules, as the country, which boasts one of the world's biggest financial derivatives markets, is exposed to rising market volatility.
Deutsche Bank was also one minute late in notifying the stock exchange that the big trade was coming on that day, when Deutsche's own CEO was in Seoul for the G20 summit and Seoul was nervous about volatile markets.
Last year, Deutsche Bank made a 16.7 trillion yen ($202.8 billion) mistrade at the Osaka Securities Exchange, raising questions about the lender's risk management systems and prompting a regulatory probe.
In recent times, Korea has seen a few other cases of investigations by financial regulators.
Last year, the head of J.P. Morgan Chase's Korean unit, Steve Lim, was investigated by financial regulators and prosecutors over alleged unfair trading.
He was later cleared of such charges and the investment bank earned mandates in recent deals including the sale of medical equipment firm Medison to Samsung Electronics Co. and the government's $6 billion stake sale in Woori Finance Holdings, which was subsequently suspended.
South Korean regulators also issued a warning to the local branch of British bank Barclays PLC in December for breaching banking and currency trade regulations.
