The recent and much talked about $320 million rogue trade on bad oil bets at a subsidiary of Japan’s biggest trading house by revenue Mitsubishi Corp. is by no means the world’s largest in terms of moneys lost, but that doesn’t make it any less embarrassing for Japan Inc.
On Friday (September 20), Mitsubishi revealed that an errant trader at the company’s Singapore-based unit Petro-Diamond Singapore (PDS), who handled oil trades for the Chinese market, allegedly lost the colossal amount through unauthorized dealings.
The trader “was discovered to have been repeatedly engaging in unauthorized derivatives transactions and disguising them to look like hedge transactions since January of this year,” Mitsubishi said.
And it could get worse, as PDS is still examining the total amount of losses. “Although PDS has already closed the position in question and determined how much was lost on the underlying derivatives, we are now examining the total amount of losses.”
The matter has been referred to the police, and the trader’s contract has been terminated after it seems he went on holiday in August and never returned, with PDS scrambling to locate him upon spotting anomalies after July’s oil price slump.
The initial figure stated is by no means the biggest commodities rogue trade or loss in the world, or even in Japan for that matter. That dubious honor falls to “Mr Five Percent” or Yasuo Hamanaka, who lost Sumitomo Corp. $1.8 billion in unauthorized trading on the London Metal Exchange in 1995.
When Sumitomo’s internal audit was completed in 1996, Hamanaka – who earned his nickname from the percentage of the world’s yearly copper supply he was once purportedly controlled – had cost his trading house $2.6 billion. It earned Hamanaka an eight-year jail term, and perhaps a custodial sentence awaits the errant trader alleged to have carried out the rouge oil derivatives bets.
Mitsubishi said it could not comment on what impact the development would have on its earnings. But having posted only one full-year loss, in 2016, since its founding in 1954 and with declared profits of $5 billion for the 12 months to March 2019, the market does not doubt the trading house’s capacity to handle the loss.
The question marks are over its compliance mechanisms that failed to spot the rogue trades. Commentators in Mitsubishi’s home market are asking the same with a senior trader at the Tokyo Stock Exchange telling your correspondent: “This kind of breach of risk management systems and compliance, automated or otherwise, just shouldn’t happen at Japanese trading houses.”
He has a point – Mitsubishi, which trades just about everything from natural gas to nickel, is known for its operational prudency. It also needs to be stressed that the event happened at an overseas subsidiary.
But given that the trader in question – whose identity has not been confirmed by the Singapore police or officially by Mitsubishi – was hired as recently as November 2018 with a China-specific remit, and could run up so high an amount without being challenged is troubling to say the least.
What’s more, it is a massive compliance slip-up given the trader had been allegedly masking unauthorized derivatives positions as hedging transactions since January this year; pretty early on in his employment and all the way up to July when his activity finally unraveled as oil prices slumped to a three-month lows.
He then left for a “holiday” in August from which he never returned. Given that backdrop heads should roll at PDS, as well as at parent company Mitsubishi.
Meanwhile, if a revised update later down the financial year raises the amount of losses – its a $700 million figure that you should be looking out for. That’s the amount China’s Sinopec lost last year on crude hedging; the oil market’s biggest loss in recent years. Early indications are the rogue trade will not cap that mark, but that will bring Mitsubishi little comfort given the corporate embarrassment it has suffered since the rogue trade was first revealed.