Rogue traders cost Calyon $358 millon in fines

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 decline in third-quarter profits.

The traders from the proprietary trading desk - which uses the bank's balance sheet to take bets on stocks, bonds and indexes - established a large position at the end of August centred on certain credit market indexes, 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. The trading limit alert and security controls were immediately strengthened in order to prevent any such incident happening in the future."

Critics have been quick to highlight the investment bank's failure to meet the basic requirements of the Markets in Financial Instruments Directive in its risk management procedures.

UK director of software vendor ILOG 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."

For now the credit rating agencies have kept Calyon's rating stable but they will be reassessing the bank's risk and compliance functions. Both Moody's and Fitch Ratings have indicated their concern over apparent weaknesses in Calyon's risk management systems and both will be monitoring the situation closely in the coming weeks. They might consider a negative action rating.