The original rogue trader’s comment: Compliance is still an afterthought
THIS February marks 30 years since my rogue trading rocked the financial system and cratered Barings, Britain’s oldest and most venerable bank. I racked up US$1 billion in losses right under the noses of Barings’ management and compliance teams, staking vast sums of the bank’s cash in a desperate attempt to dig myself out of an ever-deepening hole. The walls came crashing down a day after my 28th birthday, with the bank declared insolvent while I fled Singapore hoping to avoid arrest.
My flight was in vain, and I was sentenced to six and a half years in jail for cheating. I did the crime, I did the time and – ultimately – I learned from my mistakes and came back chastened. If only the same could be said for the City at large. The recent news that Macquarie Group was fined millions by Britain’s Financial Conduct Authority (FCA) for allowing a rogue trader, Travis Klein, to book 426 fictitious trades to hide his losses should give every market participant pause. (In a statement, Macquarie acknowledged the penalty and said “the unauthorised trading did not affect clients, or the market, and no financial benefit or gain was derived by Macquarie or any other party directly from the activity”.)
The more things change, the more things stay the same.
My case was cited as both a black swan event and a reason to ensure that all banks and trading houses, whatever their size, wherever their location, would heavily scrutinise every level of their financial exposure and trading activity to prevent anything similar happening in the future.
The warning signs were there from the minute I was convicted, yet everyone else at Barings escaped the criminal-justice system. Of course, I was the trader who lost the money, but – had the compliance, risk and management teams not been asleep at the wheel – I would never have been able to hide the truth for so long, or cost the bank so much. (A Bank of England inquiry at the time blamed management failure and lax supervision by the BOE itself, in addition to the trading.)
That a metals and bulks trader at Macquarie, a prominent and prestigious firm, could falsify figures and hide losses of millions from his bosses speaks volumes about how much work still needs to be done to safeguard savers, investors and the economy at large. Despite all of the technology available to monitor traders’ activity, the vast sums that banks spend on the latest market surveillance tools, and dand regulators’ lofty declarations about their reach and clout in the post-credit crisis era, rogue traders can still operate with impunity for months and even years before – hopefully – being brought to book.
Klein’s misadventures were said by the FCA to cost Macquarie around US$58 million to unwind; on a bad day, those losses could have ballooned far higher and hit shareholders and stakeholders even harder. While the fine of £13 million (S$22 million) for “serious failings” is mere pocket change to the bank, the reputational hit could be far more impactful.
In the same week as Macquarie was sanctioned, a 358-page report by MPs and Lords described the FCA as being “incompetent at best, dishonest at worst” for its own perceived failures to protect consumers and investors. (An FCA spokesman “strongly” rejected the report’s conclusions.)
Macquarie’s shortcomings were compounded by the FCA’s relatively supine attitude to the lack of internal controls at the bank. The FCA must levy far higher fines against firms and take stronger punitive measures against executives in charge of rogue traders to create a meaningful deterrent to managers and board members who view regulations and compliance with derision and disdain.
When 426 fictitious trades can slip through the net so casually and easily, it isn’t that any new rules or tools are required to better maintain order, rather that compliance departments simply do their jobs thoroughly to the standards the regulations already demand. Banks should be developing artificial-intelligence tools to overcome human failings in identifying phony trades and cooked books.
The dangers are certainly not diminishing: Crypto – a sector infected by charlatans, if not outright fraudsters – is creeping further into the mainstream. The financial system shouldn’t have to suffer through another seismic event like the one I caused. But – as evidenced by Macquarie, and no doubt another bank sooner rather than later – lessons have not been learned, alarm bells have not been heard, and markets will remain at risk until compliance and risk management are finally given the same reverence as profits.
Nick Leeson, a former rogue trader, is a writer and speaker
