The UK’s Financial Conduct Authority (FCA) has issued a £13mn fine to Macquarie Bank, after a metals trader recorded hundreds of fictitious trades that cost nearly US$58mn to unwind.
Travis Klein, a junior trader on the metals and bulks trading desk at Macquarie’s London branch, bypassed internal controls to log and conceal more than 400 trades between June 2020 and February 2022, according to an enforcement action announced by the regulator today.
The FCA says the activity did not affect Macquarie’s customers or the overall market, but that it highlights gaps in the company’s systems and controls that it had failed to resolve “despite knowing of the weaknesses”.
“This should serve as an example to those we regulate; risk can come from within,” says Steve Smart, the regulator’s joint executive director of enforcement and market oversight. “You need the right systems to identify it so it can be tackled early.”
The FCA reduced the fine by 30% after it reached an early-stage agreement with Macquarie, which is incorporated in Australia and operates in commodity trading as well as financial services.
Klein, who could not be reached for comment, would have been subject to a £72,000 fine but provided evidence a penalty would cause serious financial hardship. He has also been banned from working in the financial services industry.
A statement issued by Macquarie notes that the unauthorised trading was self-reported to the regulator and isolated to one individual.
“The unauthorised trading did not affect clients, or the market, and no financial benefit or gain was derived by Macquarie or any other party directly from the activity,” it says.
“The incident was not financially material to Macquarie Group and was accounted for and noted in the Macquarie Group financial results for FY2022.”
Macquarie says it takes the matter “very seriously” and has “implemented a series of improvements to our control environment in response to the incident”. There is no connection to the company’s Australian retail banking business, it adds.
Two enforcement notices published by the FCA say that Klein was asked by supervisors in June 2020 to de-risk his trading book. At that point, he started recording fictitious trades on Macquarie’s internal systems in order to conceal loss-making positions.
Klein told the regulator he “felt he could not disappoint [commodity markets and finance] supervisors”, and the effect of the fictitious trades gave the appearance his loss position had been lowered.
The most common technique used was to enter fictitious trades with a clearing date set a day or more in the future, and continually roll that date forward, the enforcement notice says.
In February 2022, Macquarie became aware of Klein’s activity following an internal risk controls report, and his positions were unwound over the next two days.
The FCA says the fictitious trades went undetected due to “deficiencies” in Macquarie’s oversight and monitoring of trader positions, including “across significant areas of trading activity”.
These deficiencies included a futures reconciliation process that excluded trades with future-dated clearing dates. The regulator adds that processes for independently verifying broker quotes were not strong enough to detect unverified or falsified information.
The FCA also says Macquarie’s processing for escalating or resolving irregularities relied on manual processes and human judgement, which was not “sufficiently effective”.
It notes that in July 2020, senior staff discussed potential discrepancies in Klein’s activity but that the issue “was not followed up through to resolution”.
And the authority says these design issues had been identified by Macquarie before the fictitious trading activity began, but processes were left “largely unchanged”.
