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‘Rogue Traders’ And Commitment Management: Gaining Control In A Complex World

January 28, 2008

The crisis in world markets, exacerbated by the ‘rogue trader’ at Societe Generale, simply illustrates the spiralling complexity of today’s trading conditions.Our networked world has enabled a massive new array of business offerings and transactions. Most of us – including it would seem the managers of institutions like the banks – appear completely bemused by their range and meaning. And the structure of these offerings, together with the manic motivation and measurement systems that accompany them, has resulted in behavior that is more symbolic of a casino than it is of responsible business management.

The London Times commented last week on work by Roger Steare, Professor of Organisational Ethics at Cass Business School. He put more than 700 financial services executives from major firms through integrity tests  – and found that, as a group, they score lower than average in honesty, loyalty and self-discipline. This, according to Steare, indicates “a culture of greed and short-termism”.

With the massive investments by the financial services sector in risk-management systems and technology, plus all the regulatory oversight for the industry, it is shocking that such attitudes can prevail. Yet perhaps the two are directly linked. The industry rewards risk-takers at the same time as it tries to control them. It hires mavericks in order to drive growth and profits, using instruments that are incomprehensible to most people, and then tries to contain them with complex technology-based fences.

It should not be surprising when some of these mavericks find ways around the system – it is typical behavior for any group that is driven by lop-sided measurements.

What is interesting is that the problem facing financial services is not really so different from that facing any other company. We are talking here about trading commitments – or contracts. And what is needed is a system to monitor and capture those commitments, so that someone can see the portfolio and observe any specific trends or heightened exposures to risk. On one level, it seems remarkable that Societe Generale would not already have such an overview, enabling it to see the overall exposures to future market movements that resulted from M. Kerviel’s ‘bets’.  And one presumes such insights might have prompted action.

What exactly have the banks been spending money on if they do not have even such a basic contract management system, or the controls needed to capture their external trading commitments?

And will this cause management in other companies to wake up and realise the risks they face through their failure to automate this critical – and increasingly complex – area of their business?

One Comment
  1. Charlie Webster permalink

    Tim

    But is it not the face of the world that nothing gets done until something bad happens ? History repeating itself due to lack of clarrity and instructions. Rogue trader , Investment banks on the subprime. It’s what seems to get tolerated to reach a postion of a positive earnings or bottom line dollar that drives all companies.. All the subprime lendors received there money from big banks and brokerages as they pursued big line profits. And as it is a risk for all involved how can you prevent the risk takers from being the only king of the hills . I certainly don’t know the answer but it is something that just happens over and over depending on the venture and the tolerance for pain. Once a regulatory effort is made and compliance is instilled. A new way of thinking is employeed or understood and behaviour’s to be the next big thing circumvent everything that was done to improve. Including a incorporting real contracts scenarios..

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