Trader's losses grew undetected for two years

To senior NatWest executives, the most alarming feature of the pounds 90m hole that has appeared in its interest rate options business is the fact that it remained undetected for more than two years.

It now emerges that losses had been building up in the book run by the young options trader Kyriacos Papouis since late 1994 and yet they were only uncovered in February this year, three days after the parent bank had announced profits of more than pounds 1.1bn.

In part that is due to the highly complex and esoteric nature of some of the financial instruments used in debt derivatives trading.

In part it is due to the failure of management systems to identify that something was going wrong and tackle the source of the problem.

In part it was due, it now appears, to conscious efforts to obscure the losses through the mis-pricing of options and the transfer of value between trading books, which made it more difficult to detect the mis- pricing.

The mis-pricing only came to light after back-office staff at NatWest Markets - those responsible for reconciling trades on a daily, weekly and monthly basis - began to question the values attached to certain options and the way those prices had been fixed.

Martin Owen, chief executive of NatWest Markets, says: "The losses came to light through the book revaluations and testing of methodologies that are carried out on a regular basis. As we tightened our processes we began to discover more."

He does not believe there is evidence of any personal gain being made on the part of anyone. "Our continuing investigation will, however, want to look now at the motivation behind these trades," he said.

For motivation, the bank might take a look at the remuneration which its traders can take home and the pressure under which they work. The pounds 8m docked yesterday from the bonus payments of a handful of high-flyers in NatWest's global debt derivatives business shows the scale of the rewards on offer.

Traders regularly start work at seven in the morning, not finishing before six in the evening and sometimes much later if the trades they are executing involve Far East or US markets.

NatWest Markets' interest rate options division occupies only a small part of the investment bank's headquarters in London's Bishopsgate - home to one of the biggest trading floors in Europe. The division employs about 70 people in London and a further 80 overseas. And yet it is a key part of the bank's overall derivatives business, holding some very large positions out of the notional pounds 260bn on options held on NatWest's books.

In essence an option is the right to buy or sell a property at a pre- determined price in the future. The buyer pays a premium for that right. In the case of interest rates it enables the buyer to fix or hedge their debt exposure on given currencies over given time periods. At its simplest it is like switching to a fixed-rate mortgage.

However, clients of NatWest Markets would be more likely to buy the options to trade their liabilities by, for instance, swapping their exposure to dollar interest rates in five years' time for deutschmark interest rates in three years' time.

Some of the options dealt in by Mr Papouis and the small team of options traders he worked with will have been of a fairly conventional nature, heavily traded on the capital markets. But some will have been more complex options involving a much higher degree of volatility, thus making the pricing of them more subjective.

In the main he would have been trading options with clients - generally other banks or large corporate customers needing to hedge their interest rate exposure. But in addition, there would have been a small amount of proprietary trading using the bank's own capital.

What the independent investigators brought in by NatWest from accountants Coopers & Lybrand and lawyers Linklaters and Paines discovered was regular mis-pricing to obscure losses in certain option books. To make these losses more difficult to detect, the value of options was transferred between books.

In no cases will customers of NatWest have suffered losses by buying the options since the mis-pricing relates to the value that was attached to them in the bank's own books.

The five employees so far suspended by NatWest Markets form a chain of command and supervision within its interest rate options area starting with Mr Papouis.

Martin Owen, chief executive of NatWest Markets, stressed yesterday that the suspensions were not intended to imply guilt or wrongdoing on the part of anyone but were designed to enable the individuals to co-operate fully with the ongoing investigation.

But senior NatWest sources doubt that Mr Papouis could have mis-priced the options he was trading in so systematically over such a long period on his own.

Investigators also believe that the transfer of value between books points to a deliberate attempt to avoid detection as the net closed in.

Michael Harrison

News
The clocks go forward an hour at 1am on Sunday 30 March
news
Arts and Entertainment
The Doctor finds himself in a forest version of London in Doctor Who episode 'In the Forest of the Night'
TVReview: Is the Doctor ever going stop frowning? Apparently not.
Sport
footballMatch report: Real fight back to ruin Argentinian's debut
News
Bruce, left, with Cream bandmates Ginger Rogers, centre, and Eric Clapton in 1967
people
PROMOTED VIDEO
News
ebooksAn unforgettable anthology of contemporary reportage
Money
Welcome to tinsel town: retailers such as Selfridges will be Santa's little helpers this Christmas, working hard to persuade shoppers to stock up on gifts
news
News
i100
News
people
Arts and Entertainment
Architect Frank Gehry is regarded by many as the most important architect of the modern era
arts + entsGehry has declared that 98 per cent of modern architecture is "s**t"
Arts and Entertainment
Soul singer Sam Smith cleared up at the Mobo awards this week
arts + entsSam Smith’s Mobo triumph is just the latest example of a trend
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Compensation and Benefits Manager - Brentwood - Circa £60,000

£60000 per annum: Ashdown Group: Compensation and Benefits Manager - Compensat...

Data Analyst/Planning and Performance – Surrey – Up to £35k

£30000 - £35000 Per Annum plus excellent benefits: Clearwater People Solutions...

IT Systems Business Analyst - Watford - £28k + bonus + benefits

£24000 - £28000 per annum + bonus & benefits: Ashdown Group: IT Business Syste...

Markit EDM (CADIS) Developer

£50000 - £90000 per annum + benefits: Ampersand Consulting LLP: Markit EDM (CA...

Day In a Page

Wilko Johnson, now the bad news: musician splits with manager after police investigate assault claims

Wilko Johnson, now the bad news

Former Dr Feelgood splits with manager after police investigate assault claims
Mark Udall: The Democrat Senator with a fight on his hands ahead of the US midterm elections

Mark Udall: The Democrat Senator with a fight on his hands

The Senator for Colorado is for gay rights, for abortion rights – and in the Republicans’ sights as they threaten to take control of the Senate next month
New discoveries show more contact between far-flung prehistoric humans than had been thought

New discoveries show more contact between far-flung prehistoric humans than had been thought

Evidence found of contact between Easter Islanders and South America
Cerys Matthews reveals how her uncle taped 150 interviews for a biography of Dylan Thomas

Cerys Matthews on Dylan Thomas

The singer reveals how her uncle taped 150 interviews for a biography of the famous Welsh poet
DIY is not fun and we've finally realised this as a nation

Homebase closures: 'DIY is not fun'

Homebase has announced the closure of one in four of its stores. Nick Harding, who never did know his awl from his elbow, is glad to see the back of DIY
The Battle of the Five Armies: Air New Zealand releases new Hobbit-inspired in-flight video

Air New Zealand's wizard in-flight video

The airline has released a new Hobbit-inspired clip dubbed "The most epic safety video ever made"
Pumpkin spice is the flavour of the month - but can you stomach the sweetness?

Pumpkin spice is the flavour of the month

The combination of cinnamon, clove, nutmeg (and no actual pumpkin), now flavours everything from lattes to cream cheese in the US
11 best sonic skincare brushes

11 best sonic skincare brushes

Forget the flannel - take skincare to the next level by using your favourite cleanser with a sonic facial brush
Paul Scholes column: I'm not worried about Manchester United's defence - Chelsea test can be the making of Phil Jones and Marcos Rojo

Paul Scholes column

I'm not worried about Manchester United's defence - Chelsea test can be the making of Jones and Rojo
Frank Warren: Boxing has its problems but in all my time I've never seen a crooked fight

Frank Warren: Boxing has its problems but in all my time I've never seen a crooked fight

While other sports are stalked by corruption, we are an easy target for the critics
Jamie Roberts exclusive interview: 'I'm a man of my word – I'll stay in Paris'

Jamie Roberts: 'I'm a man of my word – I'll stay in Paris'

Wales centre says he’s not coming home but is looking to establish himself at Racing Métro
How could three tourists have been battered within an inch of their lives by a burglar in a plush London hotel?

A crime that reveals London's dark heart

How could three tourists have been battered within an inch of their lives by a burglar in a plush London hotel?
Meet 'Porridge' and 'Vampire': Chinese state TV is offering advice for citizens picking a Western moniker

Lost in translation: Western monikers

Chinese state TV is offering advice for citizens picking a Western moniker. Simon Usborne, who met a 'Porridge' and a 'Vampire' while in China, can see the problem
Handy hacks that make life easier: New book reveals how to rid your inbox of spam, protect your passwords and amplify your iPhone

Handy hacks that make life easier

New book reveals how to rid your email inbox of spam, protect your passwords and amplify your iPhone with a loo-roll
KidZania lets children try their hands at being a firefighter, doctor or factory worker for the day

KidZania: It's a small world

The new 'educational entertainment experience' in London's Shepherd's Bush will allow children to try out the jobs that are usually undertaken by adults, including firefighter, doctor or factory worker