FINRA Issues Guidelines to Prevent Rogue Trading

In the aftermath of the clamorous Soc Gen scandal , FINRA has issued guidance to financial firms outlining best practices for detecting and preventing rogue trading.

FINRA CEO Mary L. Schapiro pointed out that while rogue trading isn't new, pervasive elctronic trading and market lingages have increased pressure on some firms to relax internal controls.She said recent events highlight the importance of routinely and rigorously assessing risk management systems.

This is particularly important "in light of the increasingly global nature of the financial services industry, the highly competitive trading environment and the complexity of many of the products being traded," she added.

As was the case in the Soc Gen scandal, FINRA noted that firms should be equally vigilant when proprietary trading appears to be generating significant profits - rather than losses.

Soc Gen rogue trader Jerome Kerviel has indeed pointed out that when he began his unlawful trading and was making healthy profits, his actions were ignored by the bank. It was only when the markets tanked and his losses spiraled that the bank took note.

"'Firms that look the other way' or reward profitable unauthorized trading are creating incentives for this prohibited behavior and the potential for future risk of loss," FINRA warned.

The regulator noted that banks should also enforce a mandatory vacation policy. "Exemptions should not be granted except in unusual circumstances and repeated requests for exemptions should be considered a red flag warranting additional monitoring," FINRA said.

As firms currently review their internal controls, FINRA said they should pay close attention as to whether they are in fact adequately mining trade data for red flags -- and following up on these where appropriate.

Firms should also carefully monitor trading limit breaches and unrealized profit and loss, the regulator said.

The watchdog also recommended that firms be vigilant about unusual patterns of cancellations and corrections, as well as trading in products outside of a trader's known expertise without prior approval.

Meanwhile, firms should make sure that each employee's access to systems is limited strictly to what is appropriate for their function within the firm.

FINRA's full report can be downloaded from its Web site.In the aftermath of the clamorous Soc Gen scandal, FINRA has issued guidance to financial firms outlining best practices for detecting and preventing rogue trading.

FINRA CEO Mary L. Schapiro pointed out that while rogue trading isn't new, pervasive elctronic trading and market lingages have increased pressure on some firms to relax internal controls... Melanie Rodier has worked as a print and broadcast journalist for over 10 years, covering business and finance, general news, and film trade news. Prior to joining Wall Street & Technology in April 2007, Melanie lived in Paris, where she worked for the International Herald ... View Full Bio