Société Générale failure symbolic of market priorities

11 Apr 2008 email

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by Paul Francis-Grey

Société Générale, along with the industry as a whole, must shoulder the responsibility for the £3.7bn losses incurred by Jerome Kerviel in February, said participants at FOW’s 18th annual Derivatives Week London.

The French bank came in for a stinging criticism from a collected panel who were unforgiving with their remarks.
“I think it is fair to say that SocGen had a lack of adequate systems in place,” said Chris Brennan, an associate at law firm Barlow, Lyde & Gilbert. Brennan added that the bank should not have allowed Eurex’s 90 alerts go unnoticed. “Eurex asked SocGen about unusual activity and 90 different alerts were missed by the bank. Why did no one at the bank ask about such a huge margin that must have built up? How can a company allow this to go unnoticed?” Brennan added.

Steven Stewart, managing director, sales, Europe at Trading Technologies said that the derivatives industry as a whole lacks an adequate upper management.

“While there is more room for manipulation and error given the large volume increase across the industry managers should understand their traders’ positions more,” Stewart said.

Brennan was more frank in his assessment of the industry.

“There is common complacency of risk controls and it is becoming a real problem among many firms. People are critical when things go wrong but there is often a lack of robust individuals that understand what is actually going on. There needs to be more management overseeing the day-to-day running of the operations,” he said.

Original rogue trader, Nick Leeson said later during the conference that there was a staggering lack of understanding over the trades he was conducting in 1995 when Barings bank suffered losses of £827m due to his now infamous five eights account. Brennan’s comments tend to convey the picture that things have failed to move on adequately.

CME Group’s head of clearing, Kim Taylor, said that there needed to be more encouragement and investment in high skilled middle office staffing and more sophisticated technology if these violations were to be stopped.

It was also a common agreement among the panellists that back and middle office employees were not as adequately paid and that they should receive bonus rewards in line with the executing traders that manage their risk and make large profit.

“Protecting companies against large losses is as important as making huge gains,” said Stewart.

[Société Générale]

“Not all algo trading is HFT, but all HFT is algo trading. We shouldn’t throw the baby out with the bathwater when choosing to regulate HFT.”

CME's Bob Ray at Derivatives World London 2010

Société Générale failure symbolic of market priorities

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