CORPORATE NEWS

SUMMARY REPORT OF Mrs. C. Lagarde, Minister of Finance, on  EUro 4.9 billion loss incurred by SOC GEN on January 18, 2008

WHAT THE REPORT STATES: the responsibility of a sole individual (trader) cannot be formally established. The bank’s well kept secret of it Euro 4.9bn loss was in compliance with local banking regulations as regards insider information defined as « precise, confidential, and likely to have an influence on events if it came to be revealed » (article 223-2 of AMF and EU directive 2003/6/CE on insider trading and market manipulation) Such loss would have put the bank at risk and trigger loss of confidence in the bank.

HOW THE TRADER DID IT : the real unauthorized trader's position was hidden through ficticious operations : buy-sell warrants at a pre-dated date, buy-sell futures with a « pending » counterparty; buy-sell forwards with an internal counterparty with no hedging necessary; buy-sell forwards with an external counterparty with a falsified confirmation signed in advance so as to avoid questioning and suspicions as regards variances from a back office stand point.

WHAT WENT WRONG : the report also quotes the Banque de France Governor: internal control procedures « did not work as they should have and for those that did there was no follow up."  The report relies on the ongoing investigation undertaken by the local market watch dog (AMF) in order to establish Soc Gen’s lack of internal control procedures. 

WHAT TO DO NEXT : nevertheless, the report lists some basic internal control recommendations as « they must be looked at as they appear to have played a key role » in this matter. For instance, reinforce the Chinese wall between the front and back offices and review the cross links as regards the organization of the middle and back offices; monitor transactions and order cancellations when they originate from a single individual; monitor cash positions; monitor traders' nominal positions; review information system security and protect access codes; monitor atypical behavior (ie: no holiday taking) .

IN ADDITION: the report recommends the reinforcement of  existing internal control procedures and the assurance they are systematically implemented and include: an audit trail that can be guaranteed for each transaction for each trader; rigorous listing and analyses of anomalies and errors/cancellations of deals, verification of deals confirmations through reconciliation procedures, for each internal and external counterparties; documentation for deals entered with an external counterparty must include terms and conditions. 

LAST BUT NOT LEAST: the report recommends, as regards Basel 2 operational risk regulation, to speed up implementation including risk typologies, and operational risk monitoring. Get directors involved in risk management