Fictitious trades at the bank, which is part of the Australian investment and financial services group Macquarie Group, were recorded by Travis Klein, a trader working on the bank’s metals and bulks trading desk in London.
Klein traded freight, iron ore, steel and coal derivatives both as an agent for customers and as principal on behalf of the bank. As principal he managed the risk of his trading book.
After an escalation of losses in his freight book Klein was asked to “de-risk” this by his supervisors. De-risking should, theoretically, have been possible “in a matter of weeks”.
However, Klein chose not to wait because he did not wish to disappoint his supervisors. Instead, he started to book fictitious trades that made it appear that the loss position in his book had been lowered and the risk minimized as requested.
Fictitious trades
The fictitious trades “had no external impact or economic reality” and only existed on the bank’s systems. Klein continued to record these trades from June 2020 to February 2022, entering 426 in total.
He initially left the trades open for several days and then cancelled them. But this meant that the trades appeared as breaks in end of day future reconciliations. In order to avoid this Klein started changing the trade clearing date to a date one or more days in the future.
To avoid the detection of the trades Klein deliberately circumvented three of the bank’s controls including the end of day and P&L daily reconciliations.
Interestingly, an analysis of the internal communications captured by the bank reveals that Klein used his working relationship with the teams responsible for the reconciliation processes to avoid scrutiny. The idea of using a future trade clearing date, which permitted for the trades to be concealed for so long, was actually inadvertently suggested to him by a member of the bank’s market operations team.
Risk control
The fictitious trades came to light after a routine internal risk control at the bank picked up a limit breach that was caused by one of them. This particular trade was recorded by Klein, closed out and then “unclosed” later on the same day. Presumably it was this “unclosing” that led to the trade being flagged.
The FCA final notice does not provide any clues as to why this happened. It is possible that without this action by the trader the fictitious trading could have continued for longer.
The trades were unwound by the bank, resulting in losses of approximately $57.8m. No clients or counterparties were affected, nor did the trades have a direct impact on the market.
The FCA found that there were significant weaknesses in the bank’s systems and controls relating to the oversight and monitoring of trader positions intended to mitigate the risk of unauthorized trading. These failings were the main reason why the trades went undetected for so long.
We have summarized some of the key systems and control problems below.
| Daily P&L reconciliation | – Investigation threshold known to traders and at risk of being circumvented. – Team insufficiently robust in dealing with and challenging discrepancies. – Junior members operating without oversight leading reducing control effectiveness. |
| End of day reconciliation | – Manual resolution and escalation processes a critical vulnerability in the control. – Exchange cleared trades with future-date clearing dates excluded from the control, which represented another critical flaw. – Lack of robust processes in the probing and escalation of breaks with little challenge from the team or supervisors. |
| CABs reporting and monitoring | – Weekly spreadsheet received by supervisors was not practical to review. – A summary table was initially produced subject to exclusion and then auto-explain rules based on flawed reasoning. – Summary table failed to consider trends or concentration in events and so was ineffective at spotting suspicious activity. – CAB committee did not adequately respond to CAB reporting issues and mitigate the risk associated with them. |
| Broker quote verification | – A lack of robust processes enabled the submission of false market quotes. – Members of the team responsible did not source information independently and did not always independently test or review rates provided by traders. |
| Risk and control self-assessment | – Issues with how risk entries were recorded including aggregating multiple controls into one, and absence of detailed descriptions of relevant underlying activities reduced the ability to measure, prioritise and manage risks. |
The FCA noted the fact that the bank had previously been made aware of some of these deficiencies as a result of both internal and external reviews.
A project instigated by two of the external reviews could have led to an earlier detection of the fictitious trades, but was hamstrung by inappropriate governance as well as inadequate resourcing and assurance arrangements.
The bank has been fined a substantial £13,031,400 ($16,507,069) for its failings, mitigated by what the FCA noted was “a high level of cooperation during this investigation”.
Klein received a fine of £72,600 ($91,963) and has been barred from performing any function connected to regulated activity in the future.
