Derivatives in Plain Words by Frederic Lau, with a ... - HKU Libraries

Singapore futures operation was able both to initiate trades and tocontrol the way in which they were recorded and settled.64. The MA has come across a number of cases in authorized institutionswhere segregation of duties is incomplete. For example:a) the mark-to-market process is performed by the front office insteadof the back office (or separate risk control unit);b) the data used for marking to market are not obtained from sourcesindependent of the front office or are not independently verified;c) reconciliation of the back office position reports to the front officerecords are not reviewed by personnel independent of the frontoffice operations;d) incoming confirmations of deals are received in the first instance bydealers instead of the back office;e) dealing reports and profit/loss reports are either prepared by dealersor routed via dealers to senior management;f) limit monitoring is not carried out by personnel who are independentof the dealing room; andg) there is a lack of physical separation of the front and back offices.65. The MA considers that such practices are unacceptable and has requestedthe institutions concerned to take remedial measures. In some cases,it has been argued that the deficiencies are not high risk because of theexistence of compensating human and other controls and because ofconservative trading strategies. While this may be true under normalcircumstances, the lack of proper systems controls does create loopholeswhich can be exploited by unscrupulous individuals. The Barings andDaiwa Bank cases show that trust placed in key individuals may beabused and that it is dangerous to assume that a fundamental weaknessin controls can be mitigated by other, more superficial, checks and balances.Shortages of physical space or skilled personnel should not be used asan excuse to override normal control considerations.Guideline on Risk Management of Derivatives and Other Traded Instruments