Curious case of Trader Mandates (TM) and Unauthorized Trading – French Bank Fires Traders for Unauthorized Derivatives Trading

When one looks at the recent case where traders at a leading French bank were fired for unauthorized trades involving options on Indian Indexes, can't help but think which process/control related to Trader Mandates faltered resulting in the said issue.

For those unaware Trader Mandates (TM) are a risk management tool for monitoring trader activities and allow firms to define products, currencies, geographies, indices, combination of these and several other parameters for each trader on the trading floor. For instance, an equities trader in Singapore may be restricted from trading derivatives like options on Indian indices as part of firm's risk management. In such a case, options product, Indian indexes and currency will not form part of the trader mandate and any trades on these will trigger an exception for the desk head and risk team to review and sign off.

Especially in large banks and trading setups with trading operations spanning multiple geographies, products, currencies, well defined granular TMs at an individual trader level are a necessity more than a regulatory norm.

Adherence to TM is of paramount importance for risk management and exceptions to TMs (where traders do not stick to approved products or combinations) get reported to desk heads and risk teams for review, monitoring and sign off. Nonadherence to TM even gets recorded on trader performance scorecard governing their bonuses. However, recent incident calls for attention to below aspects for stronger controls over TMs.

Insufficient Granularity: Loosely defined or inadequately granular TMs can lead to ambiguity and unintended breaches. Precise mandates aligned with a trader’s role are crucial.

Detection Challenges: The effectiveness of trading and risk systems in detecting nonadherence is pivotal. Timely identification of deviations is critical for risk management.

Process Breakdowns: The process for independent TM setup, additions, modifications, review of exceptions, and signoff must be robust. Any breakdowns can result in unauthorized trading going undetected.

Dedicated Controls Unit: Having an independent controls unit responsible for creating and managing TMs ensures consistency and compliance.

Escalation Delays: Delays in reporting exceptions exacerbate risks. Prompt action is essential.

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