How to protect your firm against rogue traders

Russell, Brandon (2004-12)

Thesis (MBA)--Stellenbosch University, 2004.

Thesis

ENGLISH ABSTRACT: Many companies have suffered large financial losses as a result of the actions of rogue traders; traders taking unauthorised positions in financial markets - specifically derivatives markets. Effective operational controls must form the foundation of managing the risk of derivatives trading. A large number of institutions, specifically those directly involved in the trading of derivatives, and regulatory bodies have developed controls and procedures which firms need to put in place to help manage the risk of rogue trading. Many of the controls firms can implement are "common sense" however, there are a number of formal procedures that have been developed. These risk management practices need to be implemented and overseen by individuals who have the necessary skills and experience in dealing with the risks associated with trading in derivative instruments. Many firms consider these risk management policies and procedures to be sufficient to address the risk of rogue trading. However. many firms have come to the realisation that no matter what controls and procedures they have in place, a well-motivated rogue trader will always be able to "outfox" the system. This has Jed some firms to consider appropriate risk transference measures in addition to risk management policies and procedures. Two such measures are insurance and outsourcing. At this stage only a limited number of firms are using insuring themselves against rogue trading or outsourcing their treasury functions. Although this number is increasing, companies should not dismiss insurance and outsourcing as effective tools to combat rogue trading, without conducting thorough cost benefit analysis. This paper offers guidelines to both the common sense and formal measures that are currently employed by firms to combat rogue trading, as well as a few "fanatical" options. As rogue traders are continuously pushing the boundaries, we should be thinking out-of-the box too.

AFRIKAANSE OPSOMMING: Talle maatskappye Iy groot finansiele verliese as gevolg van die aksies van slenterhandelaars; handelaars wat ongemagtigde posisies in finansiele markte neem - veral in die handel van afgeleide instrumente. Effektiewe operasionele kontrole moet die basis vorm om die risiko van handel in afgeleide instrumente te beheer. 'n Groot aantal instellings, spesifiek die wat direk betrokke is by handel in afgeleide instrumente, en regulerende liggame het kontrolemaatreels en prosedures ontwikkel wat maatskappye in plek moet plaas om die risiko van ongemagtigde handel te help bestuur. Verskeie van hierdie kontroles wat maatskappye kan implementeer is algemene kennis, maar 'n paar formele prosedures is ook ontwikkel. Hierdie risikobestuursaksies behoort ge·implementeer en bestuur te word deur individue wat die nodige vaardighede en ondervinding het om die risiko's te bestuur wat geassosieer word met handel in afgeleide instrumente. Verskeie maatskappye beskou hierdie risikobestuursbeleidsriglyne en prosedures as voldoende om die risiko van ongemagtigde handel aan te spreek. Verskeie maatskappye het egter tot die besef gekom dat ongeag watter kontroles en prosedures in plek is, 'n goedgemotiveerde slenterhandelaar altyd 'n manier sal vind om die stelsel te omseil. Dit het daartoe gelei dat maatskappye bo en behalwe risikobestuursbeleid en prosedures, geskikte stappe oorweeg om risiko oor te dra, waarvan versekering en uitkontraktering twee insluit. In hierdie stadium gebruik slegs 'n beperkte aantal maatskappye versekering teen ongemagtigde handel of uitkontraktering van hul tesourie. Alhoewel hierdie getal besig is om toe te neem, moet maatskappye nie versekering of uitkontraktering as effektiewe teenmaatreels teen ongemagtigde handel uitsluit voordat hulle nie deeglike koste-voordeel analises gedoen het nie. Hierdie tesis bied riglyne vir beide die algemene kennis en formele maatreels wat tans deur maatskappye gebruik word om ongemagtigde handel te keer, maar sluit ook 'n paar "fanatiese" voorstelle in. Aangesien slenterhandelaars aanhoudend besig is om die grense te oorskry, moet ons ook verby die voor-die-hand-liggende kyk.

Please refer to this item in SUNScholar by using the following persistent URL: http://hdl.handle.net/10019.1/72017
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