Better technology and HR key to stopping rogues
By Neil Ainger and Tom Groenfeldt
The nefarious rogue trading activities of Kweku Adoboli that have cost UBS $2.3 billion so far and brought to mind the actions of previous rogues such as Jerome Kerviel at Societe Generale and Nick Leeson at Barings have been much discussed at Sibos 2011.
Just why did the internal access control and monitoring systems fail? Who was looking at the cash position, if anyone? And is it wise to allow people to move from the back office to front of house trading positions? Daily News at Sibos asked a number of risk systems vendors what lessons could be learned.
Phil Cantor, senior product manager, SmartStream Technologies, said the UBS incident was “a failure of learning”. The incident mirrored that at Societe Generale, when Jerome Kerviel lost €4.9 billion in 2008 by exactly the same means – namely, booking fake hedging positions into the bank system to hide his losses.
To prevent rogue trading, as much as that is ever possible with human beings, you need a bank-wide view, he said. “Somewhere in UBS’ systems were some trades that didn’t add up, but the problem is finding them and raising a red flag. To do this, and ensure good crisis management, you must have real-time data at your fingertips and P&L information that gives you a true balance sheet.” Flexibility is key as well because financial institutions have to be able to respond to new and developing challenges.
Jennifer Hanes, executive vice-president, reconciliations, SunGard Ambit corporate banking, said the rogue trading activities at UBS represented “a failure of both systems and procedures”. For UBS, or indeed any organisation, the fundamental challenge in guarding against fraud is to ask yourself what patterns are occurring in the market right now and to be constantly on the lookout for anything out of the ordinary. “Trending and analysis software can help deliver the policy and assist managers in maintaining effective oversight,” she said.
“Nothing is ever static, so constant vigilance and flexible people and software are essential. In my opinion the risk of fraud is so significant – both monetarily and in terms of reputational damage – that it is worth making the investment in effective solutions and staff.”
John Groetch, business development manager at Calypso disagreed, stating that the UBS case was neither a failure of systems or procedure. “It was a policy issue. Almost all rogue trading occurs when people from the middle office move into the front office. If banks implemented a policy prohibiting this move, we could have avoided the situations at SocGen, Barings, Natwest, Sumitomo and UBS. This situation doesn’t require more regulation, just a change in HR policy.”
Multiple layers of technology checks and balances need to be overlaid with a strong information security policy to prevent cases like this, said Erik Stein, a vice-president at Fiserv. A peer group analysis can also contribute towards strong oversight so that anomalies can be spotted more quickly, leading to faster investigation.
Chris Davis, co-founder of Two Four, said he was shocked: “You’d think the systems would have checks and balances built in, and if not, that’s all the more reason to buy a system which has been vetted by other people.” Spoken like a vendor. Like other risk experts, he said UBS was probably using in-house systems.
Davis’ advice to risk managers? Test the systems and make sure they don’t have holes. “Start with trade capture. When the trade comes in, make sure it is recorded. Make sure you have a confirmation from the counterparty, run the trade through the life cycle and check and vet the processes.”
One of the problems, especially for the larger financial institutions, is that they have so many disparate systems, and those systems don’t necessarily communicate with each other. System A sends 1000 trades to system B, but does system B receive all of them?
Banks should focus on operational controls, said Grace O’Donnell, deputy chief executive at Information Mosaic. But, she warned: “It can be tough to find fraud if that’s what it was.” Her company’s system can look at exposure to a particular client, however, and that may have revealed problems like those at UBS, she added.
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