The bank revealed the mishap in defence documents seen by the Financial Times and submitted as part of a €163m “fat-finger” lawsuit filed in Frankfurt against BNP by a German-based day trader.
The admission risks undermining recent efforts by the bank — stung in 2014 by a then-record $8.9bn of fines by US authorities for conspiring to violate sanctions that prohibit transactions with Sudan and other regimes — to get its regulatory systems and controls in order.
“As of December 2, 2015, a technical disruption of the BNPP Arb trading system prevented automated (further) processing of any transactions that concerned secondary-market transactions in structured products in the German market,” is an accurate translation of BNP’s defence document in the Frankfurt lawsuit, which was originally written in German and refers to its subsidiary, BNP Paribas Arbitrage.
It was not until December 9 that the bank noticed its long-planned migration to a different pricing platform had caused the new system’s execution engine to be disconnected from the rest of the bank’s systems, the document continues.
This means that about 8,500 trades may not have been properly booked, extrapolating from statistics provided in legal documents by the bank on the number of trades completed on the Frankfurt and Stuttgart exchanges. It also raises questions over how well the bank was hedged if it was not fully aware of its market-risk position.
BNP declined to comment on the case, including on how many trades may have been affected, citing ongoing legal matters.
The bank denied in the defence document that the problem was down to “inadequate regulatory internal organisation.” It countered: “BNP’s risk management is considered exemplary.”
The European Central Bank’s supervisory authority, which oversees the biggest banks in the eurozone, is aware of the problem after the trader filed a breach report last month. The ECB declined to comment, as did BaFin, Germany’s markets watchdog, and the Banque de France.
The lawsuit, first filed in 2017, turns on an allegation from the trader that he is owed as much as €163m from a December 2015 trade in so-called certificates, which are retail structured products that are particularly popular in Germany. The certificate in question dropped overnight from €54,000 to €108.80 because of an inputting mistake by a BNP employee. The trader ordered 3,000 of the certificates off-exchange.
While banks can cancel fat-finger trades, they typically only have a day or so to do this. BNP’s systems-migration issue meant the trade was accepted but not logged and therefore not recognised as a mistake.
For its part, BNP argues that the trader deliberately sought out erroneously priced trades to exploit and has used public pressure to try to press his case, and has alleged malicious deception.
The bank is moving to get the case thrown out of court before a trial scheduled for later this year, on the grounds that the Frankfurt court has no jurisdiction. It argues that the trader had a duty as a counterparty to report any obvious errors to the bank, and that it moved to cancel the trade as soon as it was aware of the problem.
The trader said: “I don’t think it’s fair if on the one hand, BNP wants to rely on statutory safeguard clauses but on the other hand they ignored all control-tasks imposed by the regulators — ECB, BaFin and AMF — for a whole week.”
Additional reporting by Olaf Storbeck in Frankfurt
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