Reducing the Risk of Rogue Trading

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Board Perspectives: Risk Oversight, Issue 25 - How to Prevent Unauthorized Trading and Manage Derivatives Risk: A Guide for Boards and Executives

“Tone at the top” is vital to managing the use of financial derivatives, as dysfunctional behavior can undermine established policies and controls, creating organizational “blind spots” that can lead to inappropriate risk-taking. Effective internal control design, including segregation of authorization, execution and settlement activities, is the first line of defense against unauthorized trading or speculation.

Significant losses are an excellent example of what can happen when the trading of financial derivatives goes awry. This issue of Board Perspectives: Risk Oversight focuses on tone at the top, effective internal controls, and provides seven important questions for boards and senior executives to consider about organization’s use of financial instruments.

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