FRM Part I · FRM Exam Part I · Operational Risk
A bank's trading desk manager discovers that a junior trader has been booking fictitious offsetting trades to hide losses, and that the back office, which reports to the head of trading, did not independently confirm trades with counterparties. Which control improvement most directly addresses the root cause of this weakness?
The best fix is to separate the back office from the front office and require independent trade confirmation and reconciliation. Fictitious offsetting trades persist when the same line controls booking and verification. Insurance or higher limits do not remove this control gap.
- AIncreasing the trader's bonus deferral period
- BMaking the back office independent of the front office, with independent trade confirmation and reconciliationCorrect
- CRaising the desk's VaR limit so that fewer breaches are reported
- DPurchasing insurance to cover fraud losses by traders
Explanation
The root cause is the lack of segregation of duties between front and back office. Independent confirmation and reconciliation would detect fictitious trades. Insurance transfers part of the loss but does not fix the control failure, and a higher VaR limit would worsen oversight.
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