Rogue traders cost Calyon $358 million

Traders’ unauthorised bets on credit markets were only picked up by risk managers days later

NEW YORK – Rogue traders at Calyon in New York, the investment-banking arm of Credit Agricole, have been making unauthorised bets on credit markets. The bank is now subject to a $347.5 million charge.

The traders from the proprietary trading desk – which uses the bank’s balance sheet to take bets on stocks, bonds and indices – established a large position at the end of August centred on certain credit market indices, but the trade was executed above the authorised limit and without the bank’s authority. Risk managers were only notified when they returned to work after the Labor Day weekend.

Speaking to UK newspaper The Times, a Calyon spokesperson said: “The relevant disciplinary measures have been taken vis-à-vis the individuals concerned. The trading limit alert and security controls were immediately strengthened in order to prevent any such incident happening in the future.”

Calyon states that, as a result of the incident and current market volatility, its third quarter results are likely to be down.

Software vendor ILOG has been quick to point out that this incident highlights investment banks’ failure to meet the basic requirements of the Markets in Financial Instruments Directive in their risk management procedures. UK director of financial services, Geoff Round, says: “This story clearly demonstrates the value of business rules in regulatory and compliance projects at investment banks. The fact that it took so long for risk managers at Calyon to be made aware of the rogue trading is not only worrying financially for the company but also poses questions about investment banks’ ability to identify high-risk trading practices as stipulated in the Mifid regulatory framework. Such breaches should not be allowed to occur, given the capabilities of business rules technology to identify and report these inconsistencies in real time.”

“It is good to see that Calyon has taken disciplinary action against members of staff involved. What is more important, however, is that a review is carried out to identify why such practices are able to take place and how IT systems can be revised to avoid further financial and, more crucially, regulatory repercussions in the future,” he adds.