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Hector Sants warns banks to improve mis-pricing checks

The FSA has warned banks and investment firms to improve checks to prevent mis-pricing of trading positions and to stop cutting back on staff who work in valuation control functions.

Chief executive Hector Sants wrote to CEOs last Wednesday warning that current market conditions increase the valuation challenges and risks faced by banks and investment firms. He says a “large number” of material mis-marking incidents have recently occurred.

Sants also called for firms to “carefully consider” any headcount reductions that will affect valuation control functions.

Sants says: “Our close and continuous review work over the last 12 months has shown that firms’ valuation processes and controls have become increasingly stretched and in some cases have proven to be materially flawed or inadequate.”

Weaknesses identified by the regulator include inadequate checks on traders by senior front office staff, product control staff not challenging the trading floor and poor technology for verifying prices.

The letter was sent on the same day that Credit Suisse was fined for failing to prevent traders deliberately mis-pricing assets.

The regulator says it will conduct checks in the first half of 2009 to make sure firms have improved their systems.

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