Description
This is a presentation explaining the case study about rouge currency trader.
MIS Case Study :
Rogue Currency Traders at Allied Irish Banks : How could it happen ?
Background
• Allfirst : Subsidiary of Allied Irish Bank Plc. ( AIB) • • Allfirst provided corporate, commercial, correspondent and retail banking services in the mid Altlantic states. They suffered a $750m loss which was later lowered to $691.2m.
• John Rusnak, a foreign exchange trader at AllFirst was held responsible. • The losses were due to the unauthorised trades undertaken by Rusnak. • Rusnak’s upper limit was only $2.5m, an incredibly low figure as compared to actual losses.
HOW DID IT ALL HAPPEN
• Rusnak’s upper limit was only $2.5 million, an incredibly low figure as compared to actual losses. • Rusnak expected the price of Yen to increase as compared to Euro but it fell by 11% which further increased his losses. • To hide these losses, Rusnak told Allfirst’s treasury department that he had sold Yen currency options to hedge his bets – infact he never did. • Rusnak took advantage of the weak control environment and inexperienced employees at Allfirst. • Allfirst was using Monte Carlo, a credit rating model for currency trading.
• He himself was providing all the information to back office, thereby manipulating it and showing fake trades.
• He persuaded the back office staffers not to confirm the trades.
• The bogus options were purportedly with Tokyo and Singapore branches of major international financial institutions, which were in different time zone.
Technical loopholes
• Tropics software that captures currency trades electronically at the front desk was not installed at Allfirst. So, information was given to the back office manually by Rusnak himself.
• Crossmar which validates trade, was not used by Allfirst, so they had to rely on telephones for confirming the trade.
• • Allfirst were using Monte Carlo simulation instead of RiskBook to evaluate the risk of the currency trade. Monte Carlo simulation method used “10th-worst observation” instead of averaging, which artificially lowered the actual amount of risk to which the company was exposed.
Organisational loopholes
• AIB was using a “straight through processing” technique whereas this was not implemented at Allfirst.
• Workers were inexperienced, have undergone poor training and often lazy. • Proper supervision was not there.
• Bank allowed Rusnak to trade more then his upper limit of $2.5m, in order to earn more profits.
• Rusnak was allowed to trade during his vacations.
BUSINESS PROBLEM
Could information system coupled with proper supervision have prevented people like Rusnak from doing what he did?
Steps to counter future frauds
• Install new trading controls as soon as possible to prevent future trades. • Centralizing operations of Allfirst Treasury department in Dublin.
• AIB should install a “straight through processing” system at all its subsidiary.
Learnings from the case
• More than software controls, a function as sensitive as trading needs strict management controls.
• Workable controls in any organization must include the separation of responsibilities
? The person making the trade should be different from the person controlling or verifying the trade. ? Separate the duties between the trading desk and back office
Learnings from the case contd…
• Various things about trading, like:
? When a currency trade takes place, traders are required to hedge (buy an option in the opposite direction) to protect against a large loss. ? Both sides must legally confirm the trade, else it will not be valid, etc.
Thank You
doc_245556787.ppt
This is a presentation explaining the case study about rouge currency trader.
MIS Case Study :
Rogue Currency Traders at Allied Irish Banks : How could it happen ?
Background
• Allfirst : Subsidiary of Allied Irish Bank Plc. ( AIB) • • Allfirst provided corporate, commercial, correspondent and retail banking services in the mid Altlantic states. They suffered a $750m loss which was later lowered to $691.2m.
• John Rusnak, a foreign exchange trader at AllFirst was held responsible. • The losses were due to the unauthorised trades undertaken by Rusnak. • Rusnak’s upper limit was only $2.5m, an incredibly low figure as compared to actual losses.
HOW DID IT ALL HAPPEN
• Rusnak’s upper limit was only $2.5 million, an incredibly low figure as compared to actual losses. • Rusnak expected the price of Yen to increase as compared to Euro but it fell by 11% which further increased his losses. • To hide these losses, Rusnak told Allfirst’s treasury department that he had sold Yen currency options to hedge his bets – infact he never did. • Rusnak took advantage of the weak control environment and inexperienced employees at Allfirst. • Allfirst was using Monte Carlo, a credit rating model for currency trading.
• He himself was providing all the information to back office, thereby manipulating it and showing fake trades.
• He persuaded the back office staffers not to confirm the trades.
• The bogus options were purportedly with Tokyo and Singapore branches of major international financial institutions, which were in different time zone.
Technical loopholes
• Tropics software that captures currency trades electronically at the front desk was not installed at Allfirst. So, information was given to the back office manually by Rusnak himself.
• Crossmar which validates trade, was not used by Allfirst, so they had to rely on telephones for confirming the trade.
• • Allfirst were using Monte Carlo simulation instead of RiskBook to evaluate the risk of the currency trade. Monte Carlo simulation method used “10th-worst observation” instead of averaging, which artificially lowered the actual amount of risk to which the company was exposed.
Organisational loopholes
• AIB was using a “straight through processing” technique whereas this was not implemented at Allfirst.
• Workers were inexperienced, have undergone poor training and often lazy. • Proper supervision was not there.
• Bank allowed Rusnak to trade more then his upper limit of $2.5m, in order to earn more profits.
• Rusnak was allowed to trade during his vacations.
BUSINESS PROBLEM
Could information system coupled with proper supervision have prevented people like Rusnak from doing what he did?
Steps to counter future frauds
• Install new trading controls as soon as possible to prevent future trades. • Centralizing operations of Allfirst Treasury department in Dublin.
• AIB should install a “straight through processing” system at all its subsidiary.
Learnings from the case
• More than software controls, a function as sensitive as trading needs strict management controls.
• Workable controls in any organization must include the separation of responsibilities
? The person making the trade should be different from the person controlling or verifying the trade. ? Separate the duties between the trading desk and back office
Learnings from the case contd…
• Various things about trading, like:
? When a currency trade takes place, traders are required to hedge (buy an option in the opposite direction) to protect against a large loss. ? Both sides must legally confirm the trade, else it will not be valid, etc.
Thank You
doc_245556787.ppt