The publicity around Société Générale's (SG) 'rogue trader' incident in January highlighted the importance of adequate systems and controls to ensure firms protect themselves against the risk of unauthorised trading.
The Financial Services Authority (FSA) responded by speaking to approximately 50 of London's largest trading banks about how they have been applying the lessons learned from this recent incident of unauthorised trading.
A recent edition of Market Watch, a newsletter produced by the FSA, discussed ways in which firms can protect themselves against rogue trader risk. The full article is available at http://www.fsa.gov.uk/pubs/newsletters/mw_newsletter25.pdf
- We summarise the key points that firms should consider
when reviewing their controls and systems in order to
mitigate this type of risk.
- Review the quality of management information, as well as
exception reports available to trading management, to
establish whether these need to be updated or amended in
light of business changes and the SG incident.
- Determine if they have mechanisms in place to monitor
their traders' positions for all material
risks.
- Investigate whether large day one profits and losses, as
well as cancelled and amended trades with a large profit and
loss impact, are analysed adequately.
- Make sure the necessary reconciliations are in place and
operate effectively.
- Firms should also ensure their reconciliation processes
are designed prudently to prevent gaps or significant points
of weakness.
- Encourage traders to take two-week holidays at a
time.
It is likely that most trading firms will already have these procedures in place. However, risk management around trading activities is essential. Ensuring these controls are operating effectively is both a priority and a key responsibility for every management team.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
