Skip to content

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

At Société Générale in 2008, Jérôme Kerviel built very large unauthorized index futures positions. Which feature best explains why his fictitious offsetting trades went undetected for so long?

Kerviel exploited his knowledge of back-office control processes, entering fictitious offsetting trades to hide the true net exposure and cancelling them before confirmations or checks. Weak follow-up on control alerts and poor supervision let the concealed directional futures positions grow to very large size.

  1. AHe used his knowledge of back-office control timing to enter fake hedging trades and cancel them before confirmations or checks were triggeredCorrect
  2. BThe positions were fully collateralized by clients, so no controls applied
  3. CRegulators had exempted the bank from position reporting
  4. DHis trades were all executed through an external broker who held the records

Explanation

Kerviel had prior middle- and back-office experience and knew when controls ran. He entered fictitious offsetting trades that masked net exposure and cancelled them before checks. Control alerts were also not adequately followed up.

Did you get it right without looking?

One question tells you little. A timed set on Learning From Financial Disasters shows your real accuracy, how long you take and where you lose marks.

Practise Learning From Financial DisastersFree diagnostic mock

More Learning From Financial Disasters questions