FRM Part I · FRM Exam Part I · Operational Risk
A bank's trading desk suffers a large loss after a trader conceals unauthorized positions by booking fictitious offsetting trades, and the activity continues for months because the same person initiates trades and confirms them in the back office. Which control weakness is most directly illustrated?
The weakness is inadequate segregation of duties between the front and back office. When one person can both execute and confirm trades, fictitious offsetting entries can hide unauthorized positions, so independent confirmation and reconciliation are the key preventive controls.
- AInadequate segregation of duties between front and back officeCorrect
- BInsufficient regulatory capital for market risk
- CExcessive concentration of credit exposure to one counterparty
- DMismatch between asset and liability maturities
Explanation
The trader could both initiate and confirm trades, so no independent check existed. Separating front-office trading from back-office confirmation and settlement is the core control against concealed unauthorized trading. The other options describe market, credit and liquidity risk issues that do not explain the concealment.
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