Allied Irish Banks - The Currency Derivatives Fiasco

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Case Details:

Case Code : FINC032
Case Length : 11 Pages
Period : 1997 - 2004
Pub. Date : 2004
Teaching Note :Not Available
Organization : Allied Irish Banks
Industry : Banking
Countries : Ireland / US

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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Events Leading to the Loss

In 1989, Allfirst's currency trading activities were limited. It used to meet the foreign exchange needs of its commercial customers engaged in import/export activities, which was essentially a fee-based business and did not entail much risk.

In 1990, proprietary trading was started and a new person was recruited for the job. In early 1993, the trader left the job and Ray appointed Rusnak to the post. Rusnak introduced arbitrage trading in Allfirst. Previously, Allfirst was engaged in directional spot and forward trading - simple bets that a particular currency would rise or fall. Rusnak convinced his seniors that his trading style would enable Allfirst to take advantage of price discrepancies between currency options and currency forwards, thereby diversifying the revenue streams arising from simple directional trading. Rusnak claimed that he had vast experience in foreign exchange option trading and could easily and consistently make money by taking a large option position, and hedging the position in the cash markets...

Why Did it Happen?

Industry analysts felt that a combination of factors led to the loss at Allfirst. The bank had completely failed to implement a proper operational control system.

Due to the lack of effective control and supervision, Rusnak got an opportunity to conduct fraud and also successfully hide them from being detected. The major reasons that led to the disaster were:


There were numerous deficiencies in the control system of Allfirst. The absence of any net cash payment from Rusnak's trading activity and the difficulty in confirming trades at midnight had resulted in the back office decision not to confirm offsetting pairs of options trades with Asian counterparties from early 2000. Confirmation of all trades was the basic standard practice, and failure to do so proved to be a disastrous for Allfirst...

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