SG gives details of fraud, but questions remain

The bank announced that the trader had balanced a portfolio of directional trades on the Eurostoxx, Dax and FTSE 100 indexes with another portfolio of fictional opposing trades, making his overall risk appear low once the trades had netted out. He camouflaged the existence of the second portfolio by selecting trades that did not require cash movements, margin calls or immediate confirmation, the bank said, and also falsified documents and computer system access codes. As Risk reported last week, he used a strategy of sequential cancellations of different trades, allowing him to roll trades over without being detected.

But, the bank acknowledged, the instruments in his first (real) portfolio had required margin payments, which the bank had made without becoming suspicious. When the bank finally uncovered the fraud, it had a nominal value of €50 billion - but the margin payments involved could have been as high as €5 billion.

One London equity derivatives trader commented: "I can't see how [the margin requirements] wouldn't have shown up. It definitely wouldn't have looked like part of his legitimate job - his risk limits would have been of the order of tens or hundreds of millions."

"It doesn't hang together," another commented. "The initial margin must have been very big - billions of euros. For this to get through without being noticed, at a sophisticated bank like SG, just doesn't compute." That the margins were paid without raising the alarm points to a major failure in the bank's back office, one exchange insider added.

The rogue trades might have been in progress since last year - reportedly the Eurex exchange alerted SG to a potential problem in November 2007, but the trader remained undiscovered. The unauthorised trades reportedly started as early as 2005.

See also: "He didn't want to tell the truth immediately"
Questions remain over SG rogue trader
€4.9 billion fraud at Société Générale