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

Which of the following best describes the main lesson from the Société Générale (Jérôme Kerviel) case regarding controls over trading activity?

The lesson is that controls must look beyond net exposure and flag red-flag behavior such as fictitious offsetting trades, frequent cancellations, unresolved alerts, and traders who never take leave. Kerviel hid huge gross positions behind apparent hedges, and ignored warnings let the losses grow.

  1. AControls must detect unusual patterns such as fictitious offsetting trades, cancelled trades, and unused vacation by tradersCorrect
  2. BRogue trading is avoided when traders are paid only fixed salaries
  3. CLarge gross positions are acceptable if net exposure appears near zero
  4. DControl weaknesses are only relevant for traders without a bank-wide risk limit

Explanation

Kerviel used his back-office knowledge to create fictitious hedging trades so net exposure looked small while gross positions were huge. Alerts on cancellations, unconfirmed trades, and absence of mandatory leave were ignored. Relying on net exposure alone (option C) was exactly the failure.

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