Treasurers take a closer look

DERIVATIVES CONTROLS

By DIANE COYLE and JAMES BETHELL

A new report on companies' use of derivatives quotes Richard Breeden, head of international financial services at Coopers & Lybrand and a former SEC chairman: ``Derivatives are like a high-performance automobile. They're just great, until you see one being driven at 100mph by a drunken teenager.''

The report, published by the Economist Intelligence Unit, concluded that most of the 100 international firms it investigated had adequate controls over their use of derivatives. Nearly a third had made some improvements recently.

The survey found that 63 of the companies had audited or planned to audit their use of derivatives after the well-publicised losses suffered last year by corporations such as Procter & Gamble and Metallgesellschaft - although 37 had not. Only 5 companies said they did not use derivatives at all.

The picture of responsibility painted by this report conflicts with a survey published as recently as January by Touche Ross.

The accountancy firm questioned 26 of the biggest British companies about their policies towards derivatives.

Half of the companies responding to the Touche Ross survey did not have a written policy governing the use of derivatives, never mind one approved by the board.

Less than a quarter had reviewed their policies recently while only 58 per cent said they frequently calculated their derivatives exposure at current market prices .

Many of the corporate treasurers who were questioned by Touche Ross did not realise that even if they were only using derivatives to hedge against exchange rate or interest rate fluctuations, their exposure could change with movements in the financial markets.

In the banking industry there was more confirmation of the existence of poor management, out-dated computer systems and over-ambitious employees.

Anthony Belchambes, executive director of the Futures and Options Association, said this had been the pattern in earlier derivatives disasters like the bankruptcy of Orange County, and added: ``We seem to be seeing it again at Barings.''

However, most banks will be hoping that their own systems, which cost the industry £500m each year, will prevent any rogue traders causing them problems.

"There will not be a single bank that will be saying it could never happen there," said John Wisby, director of Lombard Risk Mangement Systems.

He said companies will be sending executives from headquarters to inspect far-flung operations.

"I have already had one client pull out of plans to set up derivatives trading at all its subsidiaries, preferring now to concentrate such risky operations at the key bases where they can be overseen more closely."