Watchdog's SocGen tip bypassed German regulators
FRANKFURT (Reuters) - The German watchdog that tipped off Societe Generale in November about suspect activity by a rogue trader did not inform German regulators about its concerns, as a major incident would have required.
However, the Hesse Economics Ministry, which supervises the Eurex derivatives exchange, said the watchdog had acted correctly.
"The Hesse Economics Ministry as the stock exchange supervisor is not responsible and is not involved in this case," a spokesman for the state ministry said. "We don't have anything to do with it."
The trading surveillance office (TSO) at derivatives exchange Eurex informed SocGen last year about unusual market activity by trader Jerome Kerviel -- months before last week's announcement of a 4.9 billion-euro ($7.24 billion) loss from unauthorized trading that the bank says Kerviel covered up.
SocGen had to unwind nearly 50 billion euros of fraudulent positions it said Kerviel built up, fuelling a sharp market downturn early last week.
If the TSO detects violations of exchange laws or other irregularities "which may impair the orderly conduct of trading", it has to inform the Hesse ministry because German states are responsible for supervising exchanges.
The TSO declined comment on what exactly had drawn its scrutiny of Kerviel's trades, leaving markets guessing about just what the bank's management had known and when.
The TSO unit's head, Michael Zollweg, cited "the sensitivity of the case" as the reason for not discussing its actions.
French prosecutors first revealed on Monday last year's tip from the TSO, heaping pressure on SocGen's management to explain how Kerviel was allowed to keep trading.
French satirical and investigative weekly Le Canard Enchaine reported that Eurex had first expressed alarm over risky positions held by SocGen on German DAX futures as far back as 2005, the year in which Kerviel started trading. The paper said Eurex raised concerns again in 2006.
Eurex declined to comment on the report.
"NO EXCHANGE RULES BROKEN"
"The trading surveillance office did report to Societe Generale in November. It happened," Karsten Hiestermann, the Hesse state government representative on the Eurex exchange council, told Reuters.
He said he did not know the contents of the report, but that it was clear that no exchange rules had been broken.
Eurex CEO Andreas Preuss told reporters late on Monday that he could not speak for the surveillance team, which operates independently.
Eurex had said only that its procedures to ensure market integrity and financial security had functioned correctly, as had its control mechanisms.
Last Friday German financial watchdog BaFin forwarded information about SocGen trades from the trading supervision unit to French regulators, a BaFin spokeswoman said, declining to give any more details.
Under German law, every exchange must have an independent surveillance body which does not take directives from the exchange although it is funded by it.
(Editing by Elizabeth Fullerton)
