How the rogue trader fleeced French bank of £3.7 billion

Last updated at 15:40 24 January 2008

Just how did the rogue trader, named today as Jerome Kerviel, manage to defraud one of the world's biggest banks of nearly £4billion?

Today the company said Kerviel, a trader in his 30s, was responsible for basic futures hedging on European equity market indices. That means he made simple bets on how the markets would perform at a future date. Such traders are usually governed by strict trading limits.

Futures trading began with selling commodities like sugar or oil to be delivered at a specified date in the future. It has expanded enormously in recent years to include many kinds of extremely complex financial instruments, but the company statement said he was involved in "plain vanilla" or the more basic forms of hedging - ie making basic bets on how European indices would perform in the future.

Kerviel was therefore expected to make straightforward calls on whether Europe's various stockmarkets would go up or down on a given day. He was then to look at the bank's portfolio and bet in the opposite direction, to minimise risk.

It appears he had gone beyond his remit, however, and was taking "directional positions". His inexperience may have contributed to his losses - losses which he then used his knowledge of the bank's security systems to cover up, hiding them in transactions, much as Nick Leeson did in 1995.

Leeson singlehandedly brought down British bank Barings through his unauthorised bets on the Singapore futures exchange. He was jailed for six-and-a-half years after running up losses of more than £300 million.

Société Générale said the rogue trader had previously worked in the bank's middle office, which oversees transactions and compliance. It was in that position, it appears, that he gained his knowledge of the bank's security systems.

According to the website Investopedia, "plain vanilla" refers to the most basic or standard version of a financial instrument. Its opposite is an exotic instrument, which alters the components of a traditional financial instrument, resulting in a more complex security.