Futures and Options Week

Futures and Options Week

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Rogue trading and the road to redemption

Nick Leeson, Kweku Adoboli, Jerome Kerviel, Yashuo Hamanaka, Boris Picano-Nacci.

Matthew Taylor.

A fairly innocuous name but one that this week joined the rogue’s gallery of derivatives traders now better known for criminal wrong-doing than for their achievement.

The former up-and-coming Goldman Sachs star handed himself over to the FBI, pleading guilty to concealing an $8.3bn position in 2007, some 10 times over the limit set for his department.

He now faces up to 20 years in prison and his former employer has agreed to pay $1.5m on top of the $118.4m it originally lost due his actions.

Running through Taylor’s story and those of others in the same infamous boat, there are some common themes – lying, concealment, escalation and fear. 

Sneak around in the dark

But there is an additional element all too often present in the common tale of rogue trading – how long they were able to continue their fraud and build up eye-watering losses before being discovered.

In the case of Taylor, his deception took place over the course of just seven days followed by six years before he was brought in front of the courts.

PFG’s owner, Russell Wasendof, spent a full two years stealing from his own clients with little more than personality and a copy machine providing his cover.

Taylor’s tale serves as warning yet again for the industry that while the villains will always sneak around in the dark, perhaps a few more street lights wouldn’t go amiss.

Blindfold the watchdogs?

"Goldman failed to have policies or procedures reasonably designed to detect and prevent the manual entry of fabricated futures trades into its front office systems," said the CFTC after fining the banking giant for not having noticed Taylor’s actions sooner.

Hindsight is often more of a curse than a cure, but of course there are often lessons to learn from past failings.

As FOWi reported last month, in the US the de-regulation campaigners have achieved some relatively under-the-radar successes.

The House Agriculture Committee approved six new bills to deregulate derivatives, modifying significant changes imposed by the CFTC under Dodd-Frank.

The bills will next be considered by the full House. 

Benefit of hindsight

While ill-considered regulatory change is often worse than no change at all, the days of light touch regulation also claimed notable victims – including the UK’s regulatory body the FSA which was disbanded this week following sustained political pressure to change.

At the Committee hearing in the US, Democrat Collin Peterson drew on his benefit of hindsight to share a warning prior to the vote.

"Two of the worst votes I ever made in this place was the Commodity Modernization Act of 2000 that exempted all of these swaps from any regulation or any margins," Peterson said.

"I didn't know any better.

“So just be careful. You can vote any way you want, but this could come back and haunt you."

Nicola Tavendale
News editor, FOW Intelligence

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