Low energy prices, work from home, and mounting industry bankruptcies - compliance is being stressed

When I have been a Chief Risk Officer in the past, when the book got stressed and I knew traders were under pressure, I started get even more focused. When people are under pressure and fear about losing their job, they become even more likely to "self justify" riskier or more problematic behavior. As many of my clients can attest, I have rephrased the old "seven stages of grief" to the "seven stages of trader misconduct"

• Denial
• Guilt
• Bargaining (with yourself) about what to do
• Depression
• "watching the market"
• Deer in the headlights
• Deer on the front bumper

The objective of most risk management programs is to stop the indecision about step three and force the trader to do something. The last resort of the risk program is to make sure the company doesn't become the deer on the front bumper.
​But that implies that the trader is going to feel pressured to do "something". And that something can, in some cases, be doing something the regulator says they shouldn't.
Yes, some compliance problems come because someone figured out a way around the edges to make money with less risk - because they cheated. But in many cases, the behavior comes because the trader feels they have nothing to lose - if they don't solve their problem they are going to be fired. And, at that time, the trader's personal risk tolerance to use company resources to bail themselves out becomes close to infinite.
Well, the trader's risk tolerance for a company regulatory risk has the same change. Frequently, the trader is not even thinking about the potential compliance risk - they are already focusing so hard on getting around risk controls. That means it is up to the compliance officer to take up that slack.
The best compliance programs have regular participation by compliance in the risk updates. When books or desks or even business divisions are having a rough stretch, compliance needs to be extra vigilant. When the entire company is at risk, the compliance function has the even tougher task of recognizing that management, in some cases, may encourage market behavior that carries even greater compliance risks.
We are headed for the rough water - it is time to check to make sure you have everything in top shape.