Société Générale bosses now say they know how accused rogue trader Jérôme Kerviel managed to hide what they now say was a position with a notional value of more than $70 billion: he simply balanced his futures positions against fake forward positions, they say. It worked, they claim, because forwards don’t require margin money be posted to an exchange. This meant that Kerviel (who surrendered himself to police on Saturday and remains in custody Monday morning) could incur margin calls on Eurex and Euronext, and the bank would pay them, because his books showed the positions balanced in forwards… which don’t require margin calls?
Huh???
SocGen is a leading provider of retail-oriented forward products, such as certificates and contracts for difference, and the implication is that Kerviel balanced his myriad long futures positions with hundreds of small fake forward positions — possibly listed as belonging to retail clients. But such forwards ARE subject to margin, albeit from the customer, who should have put it on deposit at SocGen itself.
That means that even before the positions turned against Kerviel, the bank would have had a mismatch between margin paid out to hold the futures positions and margin taken in to cover the forward positions — or at least margin on deposit to cover futures and margin on deposit to cover short forwards.
