Who is 'Jerome Kerviel'

Jerome Kerviel was a junior level derivatives trader for French securities firm Société Générale. He was charged with losing more than €4.9 billion in company assets by conducting a series of unauthorized and false trades between 2006 and early 2008. When company managers discovered that Kerviel had conducted tens of billions of euros worth of unauthorized trades, they rushed to close out the open positions (most of which were specialized equity arbitrage trades) and contain the extent of the fraud. Several of the trades were closed out with heavy losses due to a falling market at the time of sale.

BREAKING DOWN 'Jerome Kerviel'

Jerome Kerviel joined Société Générale in the summer of 2000 at the age of 23. His first position at the company was in the compliance department, but in 2005 he moved to a junior trader job working with derivatives. Kerviel's role was to capitalize on pricing discrepancies between equity derivatives and the market price of the stocks upon which the derivatives were based.

Understanding Derivatives

Derivatives are investment instruments that derive their value from another asset, such as the price of corn, a stock or an index. There are many different kinds of derivatives, such as futures, options and swaps. To limit risk in derivative trades, a long derivative position is generally offset with a similar short position. For example, if a trader purchased Euro stock market futures hoping the market would go up, typically, this bet would be offset by shorting U.S. stock futures to profit if markets decline, as European and U.S. stocks tend to move in similar fashion. Kerviel began making only one side of these bets.

Kerviel and Unauthorized Trades

With several years' experience in Société Générale's back office, Kerviel was well-versed in the company policies for approving and regulating trading among its brokers. He took advantage of this knowledge in late 2006 and early 2008 to offset his one-sided bets with the opposite position that did not actually exist by creating fake trades in the system's computers and logs, so the trades were not flagged by the bank's oversight systems. Initially, these trades were profitable. With so much early success, Kerviel feared the bank would discover the false transactions. To conceal the activity, he began creating losing trades intentionally to generate losses to offset his early gains. Managerial staff at Société Générale uncovered the unauthorized trading activity in January 2008 and took steps to unwind the positions created by Kerviel. When the dust settled, Kerviel's losses were estimated at €4.9 billion. Notably, Kerviel is not believed to have profited personally from his reckless trading, though he now falls into the infamous group of rogue traders that have collectively lost their employers billions of dollars through risky and unauthorized trading activity. Kerviel was convicted of breach of trust and other charges in French court in 2010. He was sentenced to at least three years in prison and ordered to pay restitution of €4.9 billion, though these sentences were later reduced on appeal.

RELATED TERMS
  1. Rogue Trader

    A rogue trader acts recklessly and independently of others, usually ...
  2. Underlying Security

    An underlying security is a stock, bond, currency, or commodity ...
  3. Derivative

    A derivative is a security with a price that is dependent upon ...
  4. Blow Up

    Blow up is a slang term used to describe the very public and ...
  5. Economic Derivative

    An economic derivative is an over-the-counter contract where ...
  6. Derivatives Time Bomb

    Derivatives time bomb is a descriptive term for a possible market ...
Related Articles
  1. Tech

    The Three Most Notorious Rogue Traders

    The conviction of former Barclays trader Tom Hayes has once again shone the spotlight on rogue traders. Here are three of them.
  2. Trading

    Derivatives 101

    A derivative investment is one in which the investor does not own the underlying asset, but instead bets on the asset’s price movement with another party.
  3. Financial Advisor

    SEC Derivatives Rule May Limit Diversification

    The SEC has proposed rules that will limit the use of derivatives by fund managers. Critics believe the rules will impede funds' ability to diversify.
  4. Trading

    Was Buffet Right about Derivatives as WMDs?

    Why Warren Buffet described derivatives as weapons of mass destruction, and when can they be helpful or harmful?
  5. Small Business

    How Did Nick Leeson Contribute To The Fall of Barings Bank?

    Nick Leeson was very successful in speculative trades, making huge profits but sadly was the cause to blame for the falling of Baring Banks in 1995.
  6. Investing

    Buffett Nixes Credit Derivatives From Berkshire Portfolio

    After years of gradually reducing exposure to credit derivatives, Buffett's Berkshire Hathaway finally exits the market completely.
  7. Investing

    Did Derivatives Cause The Recession?

    We may never come to a consensus on what caused the financial collapse, but derivatives definitely share a large part of the blame.
  8. Trading

    Advantages Of Trading Futures Over Stocks (APPL)

    We look at the top eight advantages of trading futures over stocks.
  9. Financial Advisor

    A Fresh Look At The Financial Markets

    Different markets provide unique opportunities and risks for investors. Find out more here.
  10. Investing

    Corporate Futures: Big Names, Big Risk

    We don't often think of Disney and derivatives, but it is one of many companies that use derivatives to hedge risks.
RELATED FAQS
  1. Are ETFs considered derivatives?

    Learn why most exchange-traded funds (ETFs) are not considered derivative securities and the special circumstances when this ... Read Answer >>
  2. What are the main risks associated with trading derivatives?

    Learn about the primary risks usually associated with trading in the derivatives market, namely market, counterparty, liquidity ... Read Answer >>
  3. What is the difference between derivatives and options?

    A derivative is a financial contract that gets its value from an underlying asset. Options offer one type of common derivative. Read Answer >>
  4. How can derivatives be used for risk management?

    Find out more about derivative securities, risk management and how derivatives could be used to hedge a position and protect ... Read Answer >>
  5. What are the differences between an annuity derivation and perpetuity derivation ...

    Understand the differences between an annuity derivation and perpetuity derivation of the time value of money. Learn the ... Read Answer >>
Trading Center