Rating agencies unmoved by Calyon’s rogue trade

The rating agencies commented yesterday, satisfied for the time being that risk management controls at the investment banking arm of Crédit Agricole are adequate following its shock announcement on September 18 that a large unauthorised credit derivative index trade would knock a whopping €250 million off third-quarter earnings.

So far, the big three rating agencies have been assuaged, giving some credence to Calyon’s claim that its trading limit alert and security controls have been strengthened in order to prevent any repeat of the operational risk management failure.

Still, they are now putting the spotlight on Calyon’s risk and compliance functions and watching carefully to see how the situation evolves. Fitch Ratings, for example, believes that the loss highlighted weaknesses in Calyon's risk management systems.

“Better controls now prove necessary. Moreover, the exact impact on Calyon's reputation and other business lines' performance remains to be seen. Fitch will be monitoring the situation very closely in the coming weeks,” it said in a statement released yesterday.

Meanwhile Moody’s said yesterday that it would consider negative rating actions should its ongoing assessment of risk management and controls raise concerns that warrant such action.

The rogue trading activity originated on Calyon’s proprietary trading desk in New York, and was brought to senior management’s attention on the evening of September 4, Calyon claims.

The non-subprime related position was largely built up at the end of August, and exceeded authorised internal limits, according to the firm. A credit derivatives trader familiar with the situation says that the initiator of the rogue trade has already been dismissed, and that several other trader and non-trader staff are now the subject of internal disciplinary action.