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The Lagarde Report: key findings

Key Findings

- The operator carried out unauthorised operations from 2005, but only from time to time and for relatively small amounts.

- In 2006, these operations remained marginal. From 2007, these operations increased very strongly to reach during the course of the year a notional sum in the order of €30 billion

- In November 2007, Eurex questioned Societe Generale about the trades made by “the operator in question”.

- In January 2008, the real positions reached €50 billion on futures on Eurostoxx, €30 billion, Dax, €18billion and FTSE 100 €2billion

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- The question has to be asked whether, given the exceptional nature of the events, the Government should have been informed before the morning of January 23.

- Given the exceptional nature of the situation and the consequences that it could have had for the stability of the financial system, it would without doubt have been advisable for the Government to have been informed before Wednesday January 23.

- In the future, it would be appropriate to clarify the communication between the authorities and the Government in this type of situation to avoid all uncertainty on the method of information, the timing of this information and the rules of absolute confidentiality which are necessary.

- The events at the Societe Generale must certainly incite the whole stock market, authorities and establishments, to undertake a deep reflection to produce better practices and rules in order to strengthen the operational security of market operations. This process could without doubt lead to an evolution of the rules over internal controls.

- The inquiry started by the Banking commission will enable it to establish possible insufficiencies in the SocGen’s internal controls. It could interest itself notably in the following elements of internal control likely to have been decisive given notably the information provided by the company:

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Surveillance of the nominal ongoing positions of the operators

Tracking treasury flows

Better exploitation of the request for information that Eurex appears to have made to the bank in November 2007

Tracking cancellations and modification of transactions from a single operator

Confirmation of operations

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Respect the Chinese walls between the front office and the back office and the transversality of middle office-back office organisation

Computer security systems and protection of codes

Surveillance of untypical behaviour.

Recommendations

The tracking of positions should be focussed on the net positions which enable an valuation of the market risk: reinforced attention should be given to notional gross sums.

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An audit should be guaranteed for each transaction by each operator.

Anomalies and errors in the treatment of operations as well as the cancellation of operations should be systematically studied and analyzed.

Confirmation of operations should always be checked by double procedures with on the one hand internal counterparties within the group and on the other hand external counterparties.

The terms and conditions of operations with external counterparties should be documented precisely

Moreover, it appears critical that the organisation of control procedures in the market rooms allows for the transactions of each operator to be followed in their entirety in order to determine their activity profile and identify more easily unusual behaviour.

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Finally, it is necessary to ensure a rigorous independence between the front office and the control units.