Firms heed Kerviel lesson by linking front and back offices

Companies move to link front and back office to mitigate rogue trading risks

BOSTON AND NEW YORK – Firms are increasingly seeking to mitigate risk by linking their front and back offices, with operations managers attempting to apply the lessons of January’s Société Générale (SG) rogue trading incident, in which Jérôme Kerviel was able to use his combination of front- and back-office expertise to dupe the bank’s internal risk control systems.

The study by post-trade operations firm Omgeo’s Americas advisory board, comprised of investment managers, broker dealers and custodians using the firm’s services, found that 88% of respondents had moved to close the gap between front and back office in response to the Kerviel example. Respondents also thought danger was imminent, with over 50% saying another SG-type incident was likely at another firm over the next 24 months.

Lee Cutrone, managing director for industry relations at Omgeo, says: “The findings of our first advisory board survey clearly indicate the importance of risk mitigation in the operational frameworks of sell-side, buyside, and custodian firms alike. Particularly in such volatile times, we need to ensure the market’s operational infrastructure is as shored-up as possible. Indeed, it takes the entire industry’s co-operation, and the survey shows that this is understood across all parties.”

Another finding, concerning trading of over-the-counter derivatives, found that over 50% of respondents expect regulation to come, and that best practice standards will not be enough to prevent regulators from tightening rules for same-day affirmation of trades.