Natexis hit by heavy equity derivatives losses
French bank Natexis Banques Populaires has made significant losses from its equity derivatives trading business due to poor risk control and failures in the bank’s valuation models.
The French bank said the revaluation of its short- and medium-term derivatives positions would “carve a large slice” out of its capital markets group profits for the second half. “We’ve heard that they [Natexis] may have lost as much as €30 million from exotic option positions,” said a dealer from the equity derivatives group at another European bank, who spoke to RiskNews on condition of anonymity. The spokeswoman declined to state the size of the losses, but said capital markets net profits would lie between €15 and €30 million for H2. The bank made an overall net profit of €90 million in the first half.
While the structured equities departments of most banks have faced a torrid trading environment in the past few months, Natexis admitted that its risk management processes had failed to effectively manage its exposures. “The difficulties are exacerbated by the inability of certain valuation models to successfully manage the current extreme volatility,” the bank said in a statement. “Certain anomalies in the data fed into the models have also been detected.”
The spokeswoman said Natexis's management was aware that some of its models used in equity derivatives valuation were “old”. But she added that the extreme volatility in the equity markets during July and August caught bank staff by surprise.
A number of dealers have expressed concern that newer entrants in the structured equity products market are failing to manage their risks correctly. Products with embedded cliquets – derivatives equivalent to a series of forward-starting, at-the-money options – are especially difficult to risk manage. This is because a fair valuation requires the correct pricing of the elusive forward volatility smile – the variation of an option’s volatility with strike price and maturity. “Mis-pricings are difficult to prove, but we definitely see competitors with prices that seem inconsistent to us,” Lionel Crassier, Paris-based head of exotic trading in the equity derivatives group at BNP Paribas, told Risk in July.
Natexis said it only uncovered the losses two days ago, and that its internal investigation had taken the most corrective action required to resolve the matter.
Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.
To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe
You are currently unable to print this content. Please contact info@risk.net to find out more.
You are currently unable to copy this content. Please contact info@risk.net to find out more.
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. Printing this content is for the sole use of the Authorised User (named subscriber), as outlined in our terms and conditions - https://www.infopro-insight.com/terms-conditions/insight-subscriptions/
If you would like to purchase additional rights please email info@risk.net
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. Copying this content is for the sole use of the Authorised User (named subscriber), as outlined in our terms and conditions - https://www.infopro-insight.com/terms-conditions/insight-subscriptions/
If you would like to purchase additional rights please email info@risk.net
More on Risk management
Buy side would welcome more guidance on managing margin calls
FSB report calls for regulators to review existing standards for non-bank liquidity management
Japanese megabanks shun internal models as FRTB bites
Isda AGM: All in-scope banks opt for standardised approach to market risk; Nomura eyes IMA in 2025
Benchmark switch leaves hedging headache for Philippine banks
If interest rates are cut before new benchmark docs are ready, banks face possible NII squeeze
Op risk data: Tech glitch gives customers unlimited funds
Also: Payback for slow Paycheck Protection payouts; SEC hits out at AI washing. Data by ORX News
The American way: a stress-test substitute for Basel’s IRRBB?
Bankers divided over new CCAR scenario designed to bridge supervisory gap exposed by SVB failure
Industry warns CFTC against rushing to regulate AI for trading
Vote on workplan pulled amid calls to avoid duplicating rules from other regulatory agencies
Top 10 op risks: change brings challenges as banks splash the cash
Higher interest margins and a trend toward insourcing drive major tech projects
Top 10 op risks: deepfakes drive rise in fraud fears
External fraud re-enters top 10 as artificial intelligence provides new tools for criminals
Most read
- Top 10 operational risks for 2024
- Japanese megabanks shun internal models as FRTB bites
- Top 10 op risks: third parties stoke cyber risk