Independent Pricing Verification

FSA recently fined the London branch of Toronto Dominion Bank (TD Bank) £490,000 for systems and controls failings in relation to one of its trading books. FSA has also prohibited a former employee of the firm, Mr Simon Richard Brignall, from performing any regulated activity.

Mr Brignall was employed as a senior fixed income trader at the firm. On 9 Mar, he resigned and revealed to TD Bank that he had been attributing false values to his trading positions for a period of almost two years. He had done this in order to hide significant losses on his trading book. He had also entered a number of fictitious trades during the two weeks leading up to his resignation.

TD Bank did not identify, through its own systems and controls, either the extent of the mispricing of the trades or the fictitious trades. FSA identified three main system and control failings in relation to Mr Brignall's trading book:

• the absence of a system of independent price verification;
• a lack of effective trading supervision; and
• a failure to implement effective trade break escalation procedures.

The most important of these was the failure to have in place a system of independent price verification in relation to Mr Brignall's trading book. This meant that there was no independent third party check on the valuations that Mr Brignall had attributed to his own trading positions. FSA regards this as a fundamental control.

The net total loss caused by Mr Brignall was CAD $8.8 million and this was borne by TD Bank. No client or third party suffered any loss and Mr Brignall made no personal gain.

This case appeared to be another Barings story. Lacking of independent pricing verification is hardly conceivable. Fortunately TD Bank was not killed by this trader.