NatWest to wield big stick

Bonus cuts, demotions and dismissals expected after pounds 50m options fiasco

National Westminster Bank is preparing to announce a package of punishments for staff associated with the pounds 50m loss on derivatives trading. Around a dozen personnel have been singled out for dismissal, bonus cuts or demotion.

The bank is expected to announce the punishments this week, based on the initial findings of an investigation by Coopers & Lybrand into the circumstances surrounding the losses incurred on the interest-rate options book held by NatWest Markets, the investment banking division.

The derivatives division, compliance department and risk management operations within NatWest Markets have all been closely scrutinised by the Coopers & Lybrand team of forensic accountants. It is in these areas that most of the action will be taken.

NatWest would make no comment. However, sources close to the investigation say there is no evidence that the losses were a result of personal gain.

Kyriacos Papouis, the former NatWest Markets trader allegedly linked to the losses on the options book - who resigned from his new employer, Bear Stearns, last week - was not interviewed by investigators and is now unlikely to be quizzed.

However, the wide-ranging Coopers inquiry has identified a number of shortcomings in supervisory and trading procedures. It is these shortfalls that underpin the tough penalties the bank is expected to impose.

The NatWest Markets staff looking at dismissal are thought to be junior executives, with two or three most at risk. A handful of staff will also be moved sideways or demoted as part of a management reshuffle that is designed to tighten procedures.

The bank is also expected to make it clear that financial penalties will be extracted from staff who have not performed in accordance with expectations. It has already been suggested that the losses incurred on the options book will affect bonuses across the investment bank, but now there is speculation that some individuals will be singled out for specific penalties.

The losses were uncovered 10 days ago. The inquiry has confirmed that the total loss is in line with the pounds 50m that NatWest has already announced. It has also identified that most of the losses stemmed from poor trading and the overall poor quality of the book, which was disguised by the mispricing.

NatWest is expected to set out the measures it intends to implement to tighten procedures in its derivatives trading operations. However, it will wait until the Coopers investigation is complete before finalising the improvements.

The bank is thought to be keen to deal swiftly and authoritatively with the problem, which came to light only days after NatWest had announced its annual results. The incident is regarded as an embarrassment rather than a systemic problem, but NatWest is not prepared to merely brush it aside.

Senior executives are determined to demonstrate that they are prepared to mete out tough punishments and to reassure clients that measures are already in place to prevent any recurrence.

Some departments have already tightened their procedures as a natural response to the problems in the options business. The bank is determined to learn its lesson from the episode.