Saturday, January 26, 2008

SocGen’s rivals rush to scrutinise unsettled contracts

(FT) Société Générale’s rival investment banks have been stepping up the monitoring of their trading books with a particular focus on unsettled bespoke derivatives contracts.

The settlement of so-called over-the-counter derivatives, which are typically cashless legal contracts between an investment bank and a third party, has been a source of mounting concern to regulators in recent years.

However, their focus has been on the world of credit derivatives and not equity derivatives, which were at the centre of the alleged fraud that emerged at the French bank this week.

Sources within the equity derivatives desks of London-based investment banks said documents confirmed hedges could go unsigned for weeks while pending approval as they were bounced between departments and counterparties.

“Everyone has a reaction of shock and awe to this kind of event,” said the head of equity derivatives at one bank. “I am going to escalate the pace of checks on unsigned confirms.”

The source said it was quite common for banks to take positions in stocks on behalf of clients and enter into hedges that could take weeks to become legally binding.

A senior manager in equities at one bank said: “The backlog in derivatives settlement isn’t just in credit derivatives – it is across the board.”

The fact that SocGen had not been able to spot such a massive fraud had also made senior managers ask questions of the size of their derivatives books and the potential risk these posed.

“The focus has to be not just on the net positions but what are the gross positions?” said the executive.

SocGen’s difficulties are likely to see regulators put increased pressure on investment banks to clear up the settlement backlog in equity derivatives. This comes amid speculation that the alleged fraud at the bank was missed partly because false hedges were not spotted because of the settlement function being overwhelmed.

No comments: