From: Risk.net

Author: Alexander Campbell

Op risk head warns algo trading could be “another Libor situation”

Cyber attack will be a leading concern for the financial industry over the year ahead, a panel at the OpRisk Europe conference in London yesterday told delegates.

Asked to predict the top operational risks for the next 12–18 months, John Wertheim, head of operational risk for Europe, the Middle East and Africa at Morgan Stanley, said: “Unauthorised trading has to be my number one risk priority, given Morgan Stanley’s profile here in London. Electronic trading, and the risks associated with hand-offs between legacy systems. And cybercrime.”

Chris Rachlin, global head of operational risk and internal control at HSBC’s technology and operations division, cited cyber attack first: “Denial-of-service attacks are especially painful for banks and their customers because most banks are using the internet much more. You have to ensure you have the right safeguards in place.” The implementation of the US Foreign Account Tax Compliance Act (Fatca) in 2014 would also be a source of significant risk, he added.

And Charlie Beach, head of investment bank operational risk control at UBS, said that “cybercrime and regulatory change” would be the largest sources of operational risk from his point of view – he warned that 2013 and 2014 would see “a clear spike in regulatory deliverables, with multiples of potential demand compared with what we have to deliver today”.

Beach added that new technology could bring risks in other areas too: “High volume electronic trading is a potential risk – as it gets more powerful and faster, you risk having bigger tail losses. The possibility of a major loss happening, if not in seconds, at least in a couple of minutes, is a big issue.”

Beach also warned that the growth of algorithmic trading could expose banks to more and greater regulatory penalties. “The [US] Commodity Futures Trading Commission is investigating potential wash trades involving algo trading,” he said. “We need to look at that so that we don’t find ourselves in another Libor situation.”

A special report on cybersecurity will appear in the July issue of Operational Risk & Regulation.