The UK Financial Services Authority (FSA) has fined Japanese bank Nomura £1.75 million for operational risk failures leading to mis-pricing of volatility and correlation in its equity derivatives business.
"The systems and controls around marking the international equity derivatives books fell far short of those expected by the FSA for a business trading complex and high-risk financial products," the FSA states on its website. According to the FSA, a "large number" of these failures existed for a "prolonged period of time", while all of the failures existed from at least January to July 2008, across the product control and front-office teams in the business.
Nomura identified the shortcomings in June 2008 after discovering the mis-marking of volatility levels on a client-facing book within the international equity derivatives business. This resulted in a £10.8 million writedown. Following this incident, correlation marks across the books were reviewed, leading to a further writedown of £5.5 million.
The FSA judged Nomura had breached two FSA principles by not conducting its business with due care and diligence, and failing to have adequate risk management systems in place. Particular grievances included "significant failings" by the product control team in conducting the independent price verification of equity derivatives, and "inadequate trader supervision" in the equity derivatives front office in Hong Kong.
Nomura's internal audit also conducted an investigation into the matter and took disciplinary action against staff involved in the mis-marking. "We now consider the matter behind us," says a spokesperson for the bank.