UK regulator the Financial Services Authority (FSA) has fined investment bank Nomura £1.75 million for “serious failings in the due skill, care and diligence” employed when book-marking within its International Equity Derivatives (IED) business.
The failings came to light following the discovery in June 2008 of mis-marking of volatility levels in Nomura’s Hong Kong single stock book. According to the FSA, a trader on Nomura’s IED desk in London noticed that the implied volatility marking of a Hong Kong underlying he had traded as part of a global basket was significantly higher than expected. This was as a result of a trader in Hong Kong mis-marking his book. The Hong Kong-based trader was subsequently suspended pending an investigation.
The mis-marking resulted in a negative valuation adjustment of £10.8 million, plus a further £5.5 million following the reassessment of correlation marks across the IED books at Nomura.
“Financial instruments must be valued correctly by traders and a firm’s systems and controls must be able to minimise the risk of traders mis-marking their positions,” said Margaret Cole, FSA director of enforcement and financial crime, in a statement. “When a firm’s systems and controls fall short of required standards, we will not hesitate to take action.”
Although the failings were identified and reported by Nomura, the FSA said they were particularly serious because they were fundamental, systemic and persisted over a prolonged period of time. All of the failings persisted from at least January 2008 to July 2008, when Nomura took remedial action.
Nomura cooperated fully with the FSA and agreed to settle at an early stage, meaning it qualified for the FSA’s settlement discount scheme. Without the discount, the fine would have been £2.5 million.
“Firms must ensure their systems and controls develop at the same rate their business operations grow; if this doesn’t happen – as in Nomura’s case – they run the risk of having systems that are inadequate for their business,” added Cole.