Financial regulators seek to find out what went wrong at NatWest Markets

AN army of financial market regulators are set to descend on NatWest Markets, the investment banking arm of National Westminster Bank, which last Friday announced a £50 million sterling hole in its options trading book, NatWest Bank is the parent company of Ulster Bank.

The Securities and Futures Authority, which licenses options traders, and the Bank of England, which regulates banks generally, both said they would be working closely together to establish what shad gone wrong at NatWest Markets.

"Supervisors work closely together and there is no doubt that we will talking about what has happened at NatWest," a Bank of England spokesman said.

But he could not confirm a formal joint investigation with the SEA, reported in some British newspapers yesterday.

The Serious Fraud Office, which investigates large fraud cases in Britain, said it was not yet involved. "We are not investigating the case, it has not been referred to us and it is not appropriate to speculate about whether it will be," a spokesman said.

It also remained unclear yesterday whether the operations of an interest rate options trader, named by banking sources as Mr Kyriacos Papouis, who now works for US securities house Bear Stearns, included any element of fraudulent behaviour.

"At the moment, this looks like a trader trying to trade his way out of a loss," a banking source said, "but it's not clear how or why it took so long to discover.

A spokeswoman for NatWest Markets said the deals had taken place over a period of time in 1996 and had come to light only in the last few days.

She confirmed the suspension of a senior options trader at NatWest Markets, named by sources as Mr Neil Dodgson. A spokesman for Mr Dodgson said he could not comment on the case but would be co-operating fully with any investigations.

The case is sure to raise again the question of supervision of derivatives trading, especially as all City firms went through an apparently exhaustive review of their risk management control systems in the wake of the Barings collapse in 1995.

Investment bank Barings collapsed under losses of £800 million after Nick Leeson embarked on a spree of unauthorised derivatives trading.

While the current case does not compare in terms of scale and does seem to have been nipped in the bud, it will still cause major waves around the City.

"We are making a very thorough review of our control systems, both internal and external," the Nat West Markets spokeswoman said. "This is a business that requires constant scrutiny you can never be complacent about the control procedures."

NatWest is also likely to lace criticism in the coming days over the suspicion that it already knew of the loss when it announced its 1996 results last week.

NatWest has vigorously denied this, saying it brought the matter to light as soon as possible and has kept regulators fully informed.