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FRM Part I · FRM Exam Part I · Learning From Financial Disasters

A bank's rogue trader hid losses by booking fictitious offsetting trades with counterparties and by delaying confirmations. Which control would most directly detect this type of concealment?

Independent trade confirmation with counterparties by operations staff outside the front office's reporting line is the most direct control. It verifies that trades exist and match terms, exposing fictitious offsets and delayed confirmations that conceal losses.

  1. ARaising the trader's bonus cap
  2. BIndependent confirmation of trades with counterparties by operations staff who report outside the front officeCorrect
  3. CIncreasing the trader's daily VaR limit
  4. DMoving the trader to a different desk every five years

Explanation

Fictitious trades and delayed confirmations are exposed when an independent function confirms each trade directly with the counterparty. Changing bonus caps or VaR limits does not verify existence of trades, and five-year rotation is too infrequent to be effective.

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