Allied Irish Bank 1
Derivatives
February 6, 2002
• AIB revealed an apparent currency fraud.
• Have to be commited by John Rusnak.
• Ireland’s largest and ...
• Failure of the back office to obtain transactions confirmations
consistently.
• To recoup money which Rusnak had lost, s...
• AIB rogue trader had accrued losses by writing non existent
options.
• Started to sell Deep-in-the-money options for hig...
• Rusnak's technique was to enter two bogus options trades
into Allfirst's trading system.
• Resulted in the creation of f...
• Rusnak persuade the Allfirst back office option pairs do not
need to be confirmed.
• Loss-making trading was carried out...
• Settled with the broker and rolled into a forward transaction
• Swapped each day into a forward forex trade between Allf...
• Made the prime brokers the back office for those trades.
• Rusnak's trading grew, as did his losses - and so did his bog...
• In January 2001, head of treasury funds management Robert
Ray ordered him to scale back his use of the balance sheet.
• ...
• Allfirst's true trading position was finally uncovered
• A back-office supervisor discovered that the supposedly
offsett...
• Allfirst's back-office staff were unable to confirm his trades
with his supposed counterparties in Asia.
• Rusnak failed...
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Allied Irish bank

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Financial Derivatives

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Allied Irish bank

  1. 1. Allied Irish Bank 1 Derivatives
  2. 2. February 6, 2002 • AIB revealed an apparent currency fraud. • Have to be commited by John Rusnak. • Ireland’s largest and World’s fourth largest banking scandal. • Losses around $691 million. 2 Introduction
  3. 3. • Failure of the back office to obtain transactions confirmations consistently. • To recoup money which Rusnak had lost, sometime in 1997 • Weak control environment at Allfirst’s treasury. 3 Reasons of the scandal
  4. 4. • AIB rogue trader had accrued losses by writing non existent options. • Started to sell Deep-in-the-money options for high premiums. • Racked up huge unrecorded liabilities for the bank. 4 Events Occured
  5. 5. • Rusnak's technique was to enter two bogus options trades into Allfirst's trading system. • Resulted in the creation of fake assets, offsetting certain real losing position in forex market. • Upto Sep 1998, fictitious deals were validated by the help of bogus broker confirmations. 5
  6. 6. • Rusnak persuade the Allfirst back office option pairs do not need to be confirmed. • Loss-making trading was carried out under prime brokerage accounts with Bank of America (BofA) and Citibank. 6
  7. 7. • Settled with the broker and rolled into a forward transaction • Swapped each day into a forward forex trade between Allfirst and its prime broker. • Accounts enabled Rusnak to increase significantly the size and scope of his real trading. 7
  8. 8. • Made the prime brokers the back office for those trades. • Rusnak's trading grew, as did his losses - and so did his bogus options positions. • In 2000, it became clear that Rusnak's trading was using an inordinately large proportion of the balance sheet. 8
  9. 9. • In January 2001, head of treasury funds management Robert Ray ordered him to scale back his use of the balance sheet. • This left Rusnak in need of an alternative source of funds • From February 2001, he turned to selling year-long, deep-in- the-money options - real ones 9
  10. 10. • Allfirst's true trading position was finally uncovered • A back-office supervisor discovered that the supposedly offsetting options deals were not being properly confirmed. • The supervisor directed the back-office employee involved to confirm all future similar trades. 10
  11. 11. • Allfirst's back-office staff were unable to confirm his trades with his supposed counterparties in Asia. • Rusnak failed to appear for work on Monday, February 4 • Cronin reported the problems to Allfirst's senior management. • They, in turn, informed AIB in Dublin. 11
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