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Regulators criticise ‘disappointing’ lack of action from lenders to strengthen risk management since 2021

flaws in risk management systems exposed by the Archegos hedge fund scandal.

In a letter sent to major lenders on Monday, the BoE said it had directed them to make improvements to their markets businesses in December 2021, months after the investment firm Archegos failed due to highly leveraged bets that went wrong.

The instruction followed a review by the central bank that found weaknesses in risk management processes had contributed to more than $10bn in collective losses resulting from the Archegos collapse.

It also comes as regulators across the world warn about the heightened risks to markets as economies continue to adjust to an era of raised interest rates.

“It is disappointing that the messages we communicated previously have not been fully addressed,” the BoE wrote.

It also pointed to the UK gilts crisis last year as evidence that “there is still some way to go in applying these lessons to fixed-income businesses”.

The BoE was forced to intervene with a £65bn bond-buying programme to halt plummeting UK gilt prices in September 2022, after the then-government’s “mini” Budget triggered a sell-off by highly leveraged pension fund vehicles, known as LDIs (liability driven investments).

The debacle led the central bank to expand a planned review of banks’ fixed-income businesses to look at the broader issues exposed by the LDI crisis.

Announcing the review’s findings, the BoE said it found a “number of shortcomings” in risk management of individual clients — known as counterparty risk — as well as failures around the “margining arrangements”, which determine how much clients owe at any given time.

It stressed that it expected companies to “extend enhanced credit due diligence principles, client disclosure standards, and counterparty risk management controls beyond those that have been introduced for hedge fund clients in equity financing”.

These should be expanded to “all client types in all secured financing and other relevant trading businesses”.

On the subject of counterparty risk, the BoE said many banks had made “insufficient attempts” to work out how concentrated their risks were to clients and collateral.

It added that some lenders had failed to establish “formal controls” to limit exposures to clients or types of assets and called for action in response.

“With the recent shifts in the global macro environment, firms should enhance the way they assess their trading and counterparty risks, incorporating new and broader stresses into their risk management processes,” the BoE wrote.

On margining, the BoE criticised lenders for “inadequate” monitoring of certain types of risk, alongside their failure to have clear policies on, for example, the discounts they apply to collateral pledged with the bank.

The letter was sent by BoE head of international supervision Nathanaël Benjamin and head of UK deposit takers David Bailey.

UK company insists offer from US group was highest it received

Abcam has defended the handling of its proposed $5.7bn takeover by Danaher, insisting that the UK life sciences company rejected inadequate bids and pushed the US group to increase its offer.

Alan Hirzel, chief executive of the Cambridge-based company, dismissed accusations by its co-founder Jonathan Milner, who plans to vote against the deal and wants to unseat the board and take over as CEO.

“This has been a robust process, a competitive process right to the end and the board has recommended the highest offer,” Hirzel told the Financial Times.

Milner, who had a 6.1 per cent stake in the company last month, has argued that the offer materially undervalues Abcam, saying Danaher’s forecasts for Abcam’s performance were substantially lower than its own guidance. He accused the board of not giving other buyers enough consideration.

But in a shareholder circular due to be published on Thursday, Abcam’s board said the $24-a-share offer was the “highest and best price” it had received after engaging with 30 potential counterparties, including 21 companies and 12 financial sponsors. It said the nearest competing offer had been $22.50, and that Danaher had raised its offer twice from an initial bid of $20.50.

Hirzel told the FT he had led a transformation of the company that had increased the share price more than fivefold since he took over in 2014. He said Danaher had not only offered the highest bid but would also allow Abcam to continue operating independently, while collaborating in areas such as diagnostics and bioprocessing.

He added that Danaher and the other bidders had all based their valuations on the company’s published forecasts, not lower estimates as Milner had suggested.

Abcam, which creates products for scientists to use in research such as custom antibodies, was founded in 1998 as a spinout from the University of Cambridge. Milner was chief executive until 2014, when he was replaced by Hirzel, and remained on the board until 2020. He argues that Abcam has been mismanaged since his departure and launched a campaign in May to overhaul the board.

The company said the $24-a-share offer was at a 39 per cent premium to the undisturbed share price on May 16, before Milner announced his intention to call an extraordinary general meeting, and a 48 per cent premium to the volume-weighted average price of $16.21 for the 30 trading days before May 16.

Milner has also questioned whether Abcam management prioritised its own bonuses over the best deal for shareholders. But the company said management pay had not changed because of the deal. It said the discussions between Abcam and Danaher about existing management incentive schemes had been negotiated after the offer price and other terms had been agreed.

Abcam last year dropped its Aim listing in favour of a sole listing on Nasdaq. But Milner believes it could also benefit from a UK listing and told the FT last month that he thought Abcam’s UK headquarters and jobs were in danger.

The company said on Thursday that Danaher was committed to Abcam’s current geographic presence, including its UK headquarters.

A global investigation into the Israeli Predator spyware firm has revealed documents showing the former prime minister was invited to pitch a deal to a German spy agency. Olmert admits working with Intellexa, recently sanctioned by the U.S., until recently

Former Israeli prime minister Ehud Olmert worked for the offensive cyber firm Intellexa and was supposed to participate in a sales pitch to a German intelligence agency on behalf of the company that was recently blacklisted by the U.S. Olmert confirmed that he consulted for Intellexa, but noted that his ties to the firm ended a few months ago.

The revelations are part of the "Predator Files" investigation, which is based on documents and evidence obtained by French magazine Mediapart and German Der Spiegel. 15 media outlets led by the EIC (European Investigative Collaborations) participated in its analysis. Shomrim, via journalist Daniel Dolev, was the Israeli partner in the project. AmnestyTech, Amnesty International's forensic laboratory, assisted in the analysis of the technical findings. The investigation also reveals how the spyware was sold to Egyptian intelligence, and was pitched across the world (see separate story).

Intellexa, an intelligence and cyber arms firm created by former Israelis, was at least until recently registered in Greece and has related entities in Ireland and North Macedonia. It serves as a one-stop-shop for state surveillance needs.

This July, the U.S. Commerce Department blacklisted Intellexa and Cytrox, both owned by different Israeli nationals, among them the former military intelligence commander Tal Dilian, after their spyware was used against human rights activists, journalists and politicians. Both Intellexa and Cytrox, which developed Predator, are at the center of a massive political wiretapping storm in Greece.

Documents obtained by this project show communications from the start of 2022 between Bernd Schmidbauer, the former coordinator of Germany’s intelligence services, and the BSI, Germany’s federal information security agency, charged with cyber security in the country. Schmidbauer tried to organize a meeting between Intellexa officials and the then-head of the BSI, Arne Schoenbohm, to pitch a defensive cyber security product created by Intellexa. The communications reveal that the BSI was hesitant, offering instead to coordinate a meeting with more junior representatives.

On January 27, Schmidbauer wrote: “I don't understand how it will work and who on your behalf will be at the meeting. We plan to include a world-class expert, a former Israeli prime minister, and the vice president [of Intellexa] who is responsible for strategy in Europe. Please get back to me and update me so we know how to proceed with the meeting.”

Despite Schmidbauer’s persistence, the meeting never took place – and the BSI backtracked all together, saying that they had no need for a defensive cybersecurity product from Intellexa.

The document seen by this investigation had the former Israeli prime minister’s name redacted, but after Shomrim contacted Olmert by phone, he confirmed that he had worked for Intellexa. When asked about a meeting in Germany, he said, “he was not there.” Olmert did not provide further details. Schmidbauer and Olmert were spotted dining in Berlin together with a number of German lawmakers in April 2022, according to German media. Olmert refused to answer further questions, noting he was on vacation. However, he did say the consulting work he did for Intellexa ended a number of months ago.

Unlike Pegasus spyware maker NSO, which is regulated by the Israeli defense ministry, Intellexa has long operated from outside of Israel – and Israeli oversight. In 2018 it bought Cytrox and merged it into the alliance of digital surveillance firms founded in Cyprus and Greece by Dilian. Cytrox developed the infamous Predator spyware in North Macedonia, with millions of dollars in initial funding from the state-owned Israel Aerospace Industries (IAI).

For years, Israel promoted spyware firms, most famously NSO, as part of Prime Minister Benjamin Netanyahu’s “cyber diplomacy.” However, after NSO was added to the U.S. entity list over two years ago, sparking a crisis between the U.S. and Israel, Jerusalem changed course and started blocking the sales of spyware to non-Western countries.

A Haaretz investigation published last summer revealed Intellexa was picking up all the deals Israel had refused to authorize – selling their digital surveillance wares to countries like Ukraine or even a notorious militia in Sudan. Simultaneously, sources and forensic findings suggested that alongside countries in which Israeli firms were once allowed to work – such as Mexico, Ghana, Colombia and Greece – Dilian-linked firms have also inked deals with clients in Saudi Arabia, Oman, Malaysia, Indonesia and Sri Lanka.

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The crypto exchange allowed Alameda to have a negative balance of up to $65 billion, prosecutors say

Months before the collapse of FTX, some of its U.S.-based employees discovered the so-called backdoor that Alameda Research allegedly used to withdraw billions of dollars of customer funds from the cryptocurrency exchange, people familiar with the matter said.

The employees who made the discovery reported it to the boss of their division, who discussed it with one of FTX founder Sam Bankman-Fried’s lieutenants, some of the people said.

But the problem never got fixed. In the summer of 2022, the leader of the team that raised concerns about Alameda’s special privileges was fired.

The backdoor figures prominently in the case against Bankman-Fried, whose trial on criminal charges of fraud began in a New York federal court this week. The former head of FTX has pleaded not guilty to all charges.

Prosecutors say Bankman-Fried stole funds from FTX customers, in part, by secretly ordering the programming of “special features” that gave Alameda—his crypto trading firm—the ability to treat FTX as a giant slush fund. Court filings have revealed a line buried deep in FTX’s code that allowed Alameda to have a negative balance of as much as $65 billion on the exchange.

Normal users couldn’t go negative on FTX. They were subject to an automatic liquidation process, in which FTX sold off their assets if their balances fell below zero. But that didn’t apply to Alameda.

In the spring of 2022, a small group of employees digging through FTX’s computer code found some of those special features. They were working for LedgerX, a small U.S. crypto-derivatives exchange that FTX had acquired the previous year. They were examining whether the code for FTX’s main international exchange, based in the Bahamas, could be used in the U.S., where regulations were much tighter.

“Just wanted to point out that there are currently a few places in the…code base where Alameda gets special treatment in one way or another,” Jim Outen, a LedgerX employee, wrote in a May 5, 2022, message viewed by The Wall Street Journal.

His boss, LedgerX Chief Risk Officer Julie Schoening, replied that “there are less rigid rules” on the offshore exchange, adding: “but yea we should clean up this sort of stuff.”

The LedgerX team unearthed several problematic practices with how FTX managed risk and handled liquidations, including Alameda’s ability to go negative and its exemption from normal auto-liquidation procedures, the people said. The team was led by Schoening, a Ph.D. in physics who had previously worked at the Commodity Futures Trading Commission, where she analyzed high-frequency trading and market manipulation.

At the time, the significance of the discovery wasn’t fully clear to the LedgerX employees. FTX was still a respected crypto exchange, and it would still be half a year before it imploded, revealing the misuse of customer funds.

Still, their team’s leader was sufficiently worried about Alameda’s treatment that she reported it up the chain of command. Schoening raised concerns about her team’s discoveries with her boss, LedgerX head Zach Dexter, people familiar with the matter said.

Dexter later discussed the auto-liquidation problem with Nishad Singh, FTX’s director of engineering and a member of Bankman-Fried’s inner circle, the people said. Dexter believed that problem was fixed after Singh removed a section of code, one of these people said.

A spokesman for Miami International Holdings, the company that bought LedgerX earlier this year, said in a written statement: “Following a thorough internal investigation, LedgerX has found no evidence that any of its employees were aware of any reported code enabling Alameda to take FTX customer assets, and firmly denies any contrary allegation.”

Singh has pleaded guilty to fraud and is expected to testify against Bankman-Fried at his trial. Prosecutors say Singh knew about FTX’s special treatment of Alameda and helped program it.

In early August 2022, Schoening was fired. The termination came after some FTX executives circulated a document containing what were purported to be screenshots of inappropriate messages she had sent to other employees, people familiar with the matter said. Some of the people said the messages were doctored or taken out of context, and suggested that Schoening irritated her bosses by identifying problems with FTX’s risk management.

Lisa Banks, a lawyer for Schoening, said: “I am unable to comment on this matter.”

FTX sometimes paid off “whistleblowers who threatened to expose the true fraudulent nature of the FTX Group enterprise,” according to a June court filing from the management team that has been steering the crypto exchange through bankruptcy.

Schoening hired the lawyer Banks, who threatened to sue over Schoening’s termination, the people said. The two sides hashed out a $5 million settlement but hadn’t completed the paperwork for the deal when FTX collapsed in November, two of these people said.

The spokesman for Miami International declined to comment on the reasons for Schoening’s firing. He confirmed that she is subject to a nondisclosure agreement.

French maker of high-speed trains blames increase in inventory build-up and delivery delays

Alstom shares plunged as much as 37 per cent on Thursday morning after the French maker of high-speed trains slashed its forecast for free cash flow as a UK project and other deliveries were delayed.

The group now expects negative free cash flow of €500mn to €750mn this year, a reversal from its earlier prediction that it would be “significantly positive”, it said in a statement on Wednesday evening. Shares were down 34 per cent to €14.2 in Paris, valuing the company at €5.46bn.

Alstom pinned some of the blame on a big increase in inventory build-up and delivery delays particularly in the US and Europe.

It said about half the impact had come from increasing production to meet new orders. “This, combined with tight supply chain conditions, resulted in a significant increase in the level of inventories and contract assets built in order to avoid production disruption and delivery delays during the first half of the year, particularly in Americas and in Europe,” it said.

A third of the cash flow squeeze stemmed from delays in completing the Aventra programme in the UK, an electric train project that it took on with the purchase of Bombardier Transportation of Canada in 2020, the company said. Alstom also suffered from a decrease in downpayments because of weaker than expected orders in the first half of the fiscal year.

The hit to cash flow is “a major blow to management’s credibility”, noted Gael de-Bray, an analyst at Deutsche Bank. Alstom’s investment grade rating “now looks at risk, with a capital increase becoming increasingly likely”.

Alstom agreed to buy Bombardier’s train unit in a deal worth close to €7.5bn, as it sought to bulk up in the face of rising Chinese competition and growing demand in Europe. A year earlier, EU antitrust regulators blocked a merger with Germany’s Siemens.