Danish media reports on expensive risk management flaw at Saxo Bank in late 2013

Risk management is a matter of principle significance for all FX firms, not just from a corporate perspective, but also as a means of ensuring that traders are adequately protected from exposure.

Today, a report by Danish news source epn.dk explains that in December last year, inadequacies were uncovered by the Danish Financial Supervisory Authority (FSA) in Saxo Bank’s risk management procedure, whereby its contract for difference (CFD) product orders in which traders speculate on price fluctuations were not closed when they exceed the collateral that customers had set, resulting in losses.

The FSA’s commentary on the matter explained that “The event can be attributed to the bank’s board and management having not been aware of the risks associated with the bank’s margin trading.”

“The bank had based its risk management of clients’ margin trading on its systems for automatic closing of margin positions, and the bank has not sufficiently taken a position on whether the bank’s minimum margin requirements and minimum requirements for securities values ​​as collateral is insufficient to meet customers’ potential losses” stated the report.

LeapRate contacted Saxo Bank’s senior management today in order to ascertain the corporate position on this matter, and can confirm that according to Kasper Elbjørn, Head of Communications, the Danish FSA inspected the bank’s approach to the risk management of clients including White Label clients. He also said that the bank has accepted the executive orders the bank has received from the Danish FSA but added that Saxo Bank already took the appropriate actions regarding risk management back in Q4 2013.

Mr. Elbjørn stated to LeapRate that it is important to underline that this whole thing was actually mentioned in Saxo Bank’s annual report, therefore making the information public, and not something Saxo Bank have been hiding, therefore pointing to a potential reason as to why international media has paid no attention.

Mr. Elbjørn concluded by explaining that “We took the appropriate actions regarding risk management already back in Q4 2013 and its very clearly stated in our annual report.”

With regard to those affected, the glitch appeared to be specific to white label partners, as the bank’s automated system would have intervened and reduced the loss of contracted security to direct private customers, however this is not the case with the company’s white label partners, which include stockbrokers, banks and finance houses which have an agreement that there should be manual functionality before the contract is closed.

According to this report, the bank admits that this generated considerable cost during December, resulting in the bank having to set aside 250 million Danish Krona, which amounts to approximately $45 million which was published on the bank’s annual report, denoting the firm’s willingness to account for the matter by setting capital aside in order to account for any negative adjustment that may arise from this matter.

“For most customers running these processes automatically, a stop was placed in time, so neither side can have greater losses than expected. But the agreement with a certain number of our white label customers is that they should be contacted manually before the contract is closed, “said Director of Saxo Bank Steen Blaafalk, himself a Danish banking veteran who was hired in February by Saxo Bank as the bank sought to dedicate skilled resources toward improving risk management procedures as well as conducting direct liaison with the FSA.

Steen Blaafalk makes clear that he considers this incident as being very serious, and on that basis he contacted the FSA and drafted an international consulting firm in to assist with the matter.

“We can not allow ourselves to get into this situation. But it is also both unique and exceptional” he stated.

“The division between the executive and the controlling part of the bank has simply not been sharp enough” he continued. “We have moved control of the assessment of this from our risk management department in the commercial section to a comprehensive risk management department, while we have strengthened our internal governance” says Mr. Blaafalk.

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Danish media reports on expensive risk management flaw at Saxo Bank in late 2013


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