Trader Controls: Managing Risks and Maintaining Reputations

In OTC Derivatives, Regulation, Thinking by New Link Editor

Over the past two decades the Financial Services Industry has come under increasing scrutiny following a series of major incidents and within the trading arms of numerous major institutions.


Rogue Trading is on the increase.
The latest scandals are just a sign that the culture is running riot without any checks in place. The rules may be tighter, but the behaviour is getting worse. There should be tougher penalties. At the moment there is contempt and disdain for the rules

Nick Leeson 2013


Moving Forward

Risk and Control Management Services

Many financial institutions still have a great deal of work to do to develop more effective control frameworks. The need for prompt action in this arena is further compounded by the fact that regulatory changes are outpacing institutional efforts to keep up.
Public pressure will inevitably force regulators to increase their scrutiny of financial institutions and more interventions are likely to occur, resulting in more fines and criminal prosecutions, which will do little to improve the reputation of the sector. So, the need for robust, evidence-based frameworks underpinned by reliable risk data cannot be emphasised enough.

Risk and Control Framework – Toolkit

With resources scarce, introducing a comprehensive risk and control management system can represent a significant investment. New Link Consulting’s team has the experience and extensive knowledge of the regulatory environment to work with your organisation to develop a dedicated and cost conscious risk and control framework

The Risk and Control Framework (3LOD Model)

Financial institutions are developing their own measures to enhance risk and control frameworks.


The 3LOD model being typically deployed articulates the roles to be played within an organisation. It illustrates the importance of clearly assigning ownership of specific risks and creating a comprehensive data architecture which consolidates risk data and reports (for example, risk by business, function, region etc). It’s vital that the three lines work coherently to deliver efficient and complementary risk management processes which avoid duplication and are deployed with
integrity and independence.

The 3LOD Model

All risk management activities should link to, and flow from the risks inherent within the organisation and its business strategy and organisation. All 3 lines should have clear responsibility for specific risks with all reporting should be aligned to these.

In the wake of these highly publicised scandals, which have resulted in reputational harm affecting the entire sector, the question remains: why do financial institutions still fail to prevent events of this nature from occurring, and what can be done to adequately and efficiently identify and manage the underlying risk? New Link Consulting’s Risk and Control Services can assist organisations to identify potential risk exposures before they crystallise, offering a package of solutions to avoid operational events and reputational damage and/or to undertake remedial action should they occur.

Two Decades of ‘Dishonourable’ Dealing

In 1995, Nick Leeson, a derivatives broker, brought down Britain’s longest established merchant bank, Barings, having engaged in unauthorised ‘rogue trading’ which accumulated losses of US$1.3 Billion. Leeson’s fraud set an unfortunate precedent, as the following two decades have seen a succession of rogue traders become cumulatively responsible for billions of losses and untold reputational damage to the Financial Services Industry.

  • The industry has also seen a series of fundamentally misjudged corporate decisions and dubious practices cause yet further damage.
  • Poor Product Design and Mis-selling: Inadequate sales processes, where products have been poorly designed and/or sold unfairly to clients (eg Interest Rate Derivatives mis-selling)
  • Rate Setting: Manipulation and/or rigging of market reference pricing (eg LIBOR/FX)
  • Compliance Failures: Major control failures linked to KYC and AML processes and controls

In this increasingly toxic climate, public scrutiny is an inevitability, prompting a succession of responses from the industry. The regulatory stance has stiffened, penalties have increased significantly and a series of major internal reviews have been commissioned to explore the underlying issues, causal factors and the likelihood of such events recurring.

History Repeating: Recurrent Threads in the Pattern of Failure

Whilst every act of fraud or mismanaged enterprise have their own specific characteristics, a number of recurring themes are common to all. These include:

  • A poor risk culture, including inappropriate incentives driving wrong behaviours
  • Unclear roles and responsibilities, leading to a lack of accountability
  • Poor corporate governance coupled with excessive or unspecified risk appetite
  • Inadequate supervision, oversight and independent challenge of behaviours
  • Inadequate or ineffective controls or repeated failures
  • Aggressive market conduct with a lack of client focus

Regulators have repeatedly drawn attention to these failings and called for remedial action, but some institutions have yet to address these concerns, so the risk of recurrence remains high.

The challenge for financial institutions is to embed a well-defined risk and control framework that is fit for purpose, capable of withstanding scrutiny and sufficiently transparent to engender public and regulatory confidence.

The Regulatory Stance: Conduct Risk

In the wake of recent financial improprieties, regulators were inevitably going to adopt a more pro-active stance. In the UK, The FCA makes its position very clear in its Mission Statement:

“To regulate firms and financial advisors so that markets and financial systems remain sound, stable and resilient. We also encourage transparent pricing that’s easy for everyone to understand. Our aim is to help firms put the interests of their customers and the integrity of the market at the core of what they do”

A central tenet of the FCA’s mission is the concept of managing Conduct Risk, defined as:

“The risk that a firm’s behaviour will result in poor outcomes for customers, firms, markets and stability. This incorporates culture, tone from the top, governance and control.”

All financial institutions are now expected to be developing frameworks which maintain market integrity and protect clients’ interests.

The Conduct Risk Framework

The Regulatory Stance: Senior Management Responsibilities

Recently, senior managers have been adjudged by regulators and the general public to have failed consistently in their duty to competently manage their activities.

The adoption of a revised Senior Management Regime should see clearer definition and control of key management roles and responsibilities. Senior managers will be subject to certification and ongoing monitoring and evaluation to ensure they maintain standards and competency, All of this will be underpinned by a new Code of Conduct, which will be formally launched in 2017.