FSA warns City over rogue trader dangers

It warned London's banks there is still a high risk of rogue traders, particularly in today's highly volatile financial markets.

In its first full response to the SocGen affair, in which the bank lost €4.9 billion (£3.75 billion) after Kerviel ran up and hid bets on European stock markets worth more than €50 billion, the FSA said it has spoken to some 50 of the largest trading banks in London.

Many had already reviewed and put in place checks to improve their trading controls, the watchdog said. But today it handed them a lengthy checklist of simple procedures to try to prevent similar fraud.

These are drawn from the lessons learned about Kerviel, not just from public information but from confidential details provided by their French regulatory counterparts.

The FSA said: "In view of the criminal investigation in France, and of the ways in which the 'rogue trader' appears to have disguised his activities, there is likely to be more to learned in the future."

Full two-week holidays by traders not only make it easier to catch rogues but also act as a natural preventative measure. Firms should also consider "desk holidays", where traders are switched away from their usual book and colleagues take over trading and valuing it.

Supervision within firms needs to be wider and deeper, with firms needing to make sure that back-office staff understand how front-office traders work - including precisely what they are allowed to trade in, and to what scale.

In particular, as was the case with Kerviel, if minor faults trigger a number of "yellow" flags across different areas, does that automatically raise a "red" signal of possibly greater dangers?

The FSA said firms should look out for, and be able to understand, where large one-day movements in a trader's profit-and-loss account come from and be ready to seek explanations. It also recommends tightening computer security, including more frequent changing of passwords.

Firms should be able to identify when a trader has signed on somewhere else than at his own desk. Kerviel was said to have gone undetected for so long because of his previous, and extensive, back-office expertise.

Sally Dewar, head of wholesale markets at the FSA, said: "We are encouraged that many firms in London with significant trading activities are working to satisfy themselves that their basic controls and governance surrounding trading risk management and settlement are effective.

"But the risks remain and we would urge firms to remain vigilant on unauthorised trading, especially in current market conditions."

Société Générale today said its €5.5 billion rights issue had been fully taken up at its heavily discounted price of €47.50 a share.