NAB publishes report on options losses

The National Australia Bank (NAB) has published a report on the A$360 million ($262 million) options trading scandal, which blames weaknesses in risk management controls and inadequate management supervision for the losses.

The report follows a two-month investigation by consultancy firm PricewaterhouseCoopers (PWC) after the losses were first revealed on January 13. The 52-page report points to a number of contributing factors, including inadequate management supervision, significant gaps in back-office monitoring functions, escalation processes that did not work properly, weakness in control procedures, failure of risk management systems and an absence of appropriate financial controls in its markets division.

The bank this morning formally dismissed the four traders responsible for the unauthorised trading - Luke Duffy, David Bullen, Gianni Gray and Vince Ficarra. The head of foreign exchange in the markets division, Gary Dillon, who was the direct supervisor of the four traders, has also been dismissed.

Meanwhile, Ian Scholes, the executive general manager of corporate and institutional banking; Ron Erdos, head of markets division; and Chris Lewis, executive general manager of risk management, have all left the bank.

In the wake of the report, the bank has announced a four-point plan that includes board changes, management changes, risk and control frameworks and culture changes. Both the chairman and chief executive of the bank, Charles Allen and Frank Cicutto, resigned last month. The bank today appointed Peter Duncan as chairman of the board risk committee, replacing the new bank chairman Graham Kraehe; and John Thorn as chairman of the audit committee, replacing Catherine Walter. Meanwhile, the bank also appointed Ken Moss as the senior independent director. All three were already NAB board members.

John Stewart, the bank’s chief executive, said the management team would continue to work towards closing the gaps and loopholes that were exploited by the traders. “We will refine our risk management framework to get a more appropriate balance between management and policing functions,” he said, adding that the bank already reviewed its value-at-risk limits, which were consistently breached by the traders over a two-year period. These breaches in limits were identified and approved by management, and were not treated seriously, the report says. The risk management department was also aware of the limit breaches, but failed to escalate warnings to the chief executive.

“Weaknesses in control procedures identified by PWC have been or will be rectified without delay,” said Stewart. “This includes analysis of daily trading profits and accounts, reporting of all large and unusual transactions, investigation of all off-market rates on high-risk transactions, critical review of revaluation rates sourced from third parties and a stronger back-office function that properly checks all transactions.”

The management team will also review responsibilities between business units to ensure there are clear reporting lines between risk management, operations and finance functions within NAB, added Stewart. “It is totally unacceptable that employees of the National breach policies and control limits,” he said. “From now on, there will be a zero-tolerance policy towards unauthorised limit breaches at the National.”