Lisa Buckingham and Alex Brummer
A FRESH initiative to revamp bonuses and so stamp out the wildest risks taken by City of London derivative traders is expected to follow the $80-million scandal at NatWest Markets that this week helped to wipe nearly $900-million off the stock market value of the banking group.
Anthony Bellchambers, chief executive of the Futures and Options Association (FOA), said the FOA was likely to consider proposals to provide better links between salaries and long-term performance. It might issue new guidelines to improve the scrutiny of dealing in complex financial instruments where failures have opened the way for incidents such as the Barings collapse and the Sumitomo copper scam.
NatWest insisted the $80-million charge it will take against first-half profits was a conservative provision for the losses incurred by the “mis-pricing errors” believed to have been booked by Kyriacos Papouis.
The young interest rate options trader, who had worked for NatWest Markets for about two years in what was his first City job, left the banking group towards the end of last year and was said to be “on leave pending further information” by his new employer, the United States securities house, Bear Stearns. There was no comment from Neil Dodgson, suspended for failing properly to supervise Papouis.
Despite intensive investigation over the weekend by teams of forensic accountants, NatWest said it was likely to take weeks before its inquiry into the mis-pricing scandal was complete, although a representative said it appeared unlikely that more heads would roll.
Meanwhile, NatWest heightened its internal supervisory systems in an attempt to head off similar debacles elsewhere in the organisation.
The FOA’s move on remuneration is expected to be welcomed by the Bank of England, which this week issued a warning about the dangers of tempting City traders to take risks to achieve big bonuses.
The City is looking too accident-prone for comfort as an international financial centre. The hole in the accounts of NatWest Markets is symptomatic of deeper concerns.
A clear line can be drawn from the Barings collapse two years ago to the absorption of SG Warburg into the Swiss Bank Corporation and the difficulties at Morgan Grenfell Asset Management.
All these events can be traced to weaknesses inside City-based financial houses, most obviously the bonus structure which provides such huge incentives to successful traders that it pays them to cheat, and encourages internal supervisors to see no evil. The FOA’s backing for a more rational bonus structure, while welcome, should have come much earlier.
A second problem is the investment priorities of City houses: Deutsche Morgan Grenfell will think nothing of paying multi-million transfer fees to get a good trader or fund manager, but will not consider applying similar sums to the compliance or risk assessment officers whose duty is to keep more adventurous traders in line.
Finally, there has been a woeful neglect in putting in place the processing systems to support the volume of trading in derivatives.