FSA Publishes Commentary On Societe Generale Rogue Trader

by Philip Morton, Investors Offshore.com

11 March 2008

The UK's Financial Services Authority (FSA) on Tuesday announced the publication of issue number 25 of Market Watch, which focused on firms' reviews of their systems and controls in light of the Société Générale (SG) 'rogue trader' incident.

Since SG's announcement on January 24th, 2008, FSA supervisors have spoken informally to some 50 of the largest trading banks in London. Many have already put in place reviews to identify and correct gaps that may exist in their trading controls, the regulator revealed.

The Market Watch publication highlighted the measures that firms should consider when reviewing systems and controls which protect them against 'rogue trader' risk.

The FSA observed that: "In the current volatile market environment, with the risk of inappropriate practices quickly leading to significant losses, early discovery and remedial action are even more important than in more benign conditions."

Amongst other areas, Issue 25 of Market Watch looked at:

• Front office culture and governance, in particular traders encouraged to take two-week continuous holidays, and appropriate segregation of front office staff from middle and back office functions;
• The use of suspense accounts;
• The quality of management information, both routine and outside normal parameters; and
• Elementary IT precautions, such as whether access to systems is password dependent.

Sally Dewar, FSA MD of Wholesale and Institutional Markets, announced that:

"We are encouraged that many firms in London with significant trading activities are working to satisfy themselves that their basic controls and governance surrounding trading, risk management and settlement are effective."

"But the risks remain, and we would urge firms to remain vigilant on unauthorised trading, especially in current market conditions."

The FSA stated that it will continue to engage with firms on these issues over the coming months, and will also maintain its current regulatory dialogue with international colleagues about this incident and the wider issues that it raises.

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