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FRM Part II · FRM Exam Part II · Case Study: Financial Crime and Fraud

A trading desk at a bank reports consistently smooth profits with very low volatility, despite operating in volatile markets. The desk head also resists taking leave and insists on handling confirmations personally. Which risk management response is most appropriate in light of lessons from major rogue-trading cases?

The best response is to enforce mandatory consecutive leave and segregate trading from confirmations and settlement. Smooth profits and a trader controlling back-office tasks are classic rogue-trading red flags, and independent processing is what reveals concealed or fictitious positions.

  1. AReward the desk head with a higher bonus because returns are stable
  2. BEnforce mandatory consecutive leave and segregate front-office trading from confirmations and settlementCorrect
  3. CReduce the desk's VaR limit but leave reporting lines unchanged
  4. DRely on the desk head's own attestation that controls are effective

Explanation

Unusually smooth returns and a trader controlling back-office functions are classic red flags in rogue-trading cases. Mandatory leave and segregation of duties expose concealed positions and fictitious trades. Cutting VaR limits alone does not address the control override, and attestation by the person being monitored is not independent.

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