Case Study - National Australia Bank – FX Options

This case study consists of the “Investigation into foreign exchange losses at the National Australia Bank, 12 March 2004.”


  • The National Australia Bank staff members involved in the currency options trading are referred to as Traders.
  • The Traders’ activities were contrary to the NAB’s strategy. The risk exposure of the currency options desk to the US dollar increased significantly in late 2003. This exposure resulted in significant losses when the US dollar fell by some ten cents against the Australian dollar.
  • By the 12th of January 2004, false transactions with a reported value of A$185 million were included in Horizon (the currency options trading and processing system), and on 13 January 2004 the NAB made the first announcement of the losses, then estimated at A$180 million. By the 27th of January 2004, after adjusting for a revaluation of the portfolio, total losses of A$360 million were announced.
  • The Traders concealed losses by entering various types of false transactions into the trading system, Horizon. Various methods were used which exploited gaps in controls. The key methods were:
    • Incorrectly recording genuine transactions
    • Entering false transactions
    • Using incorrect revaluation rates

Risks Incurred

  • Operational Risk – Integrity of people
  • Operational Risk and Market Risk – Risk and control framework
    • The currency options trading activity lacked adequate supervision.
    • Risk management failed.
    • There was an absence of financial controls.
  • There were significant gaps in back office procedures.
  • Operational Risk – Governance and culture

Potential Mitigation

  • The daily profit and loss analysis for large movements is “not an effective tool” because significant profit and loss differences arose from the use of different systems in the front and back offices. In addition the profit and loss is not reconciled daily to the general ledger, but monthly. Other experience shows the importance of this control and the need to explain large daily profit and loss movements.
  • The extent of proprietary trading and how to monitor and control it.
  • The involvement of the Chairman and CEO in the risk infrastructure and regular reporting to them to monitor the trading business.
  • That all transactions should be checked for reasonableness of market price and economic rationale.
  • Proper limits need to be in place.
  • The need for several senior managers in a unit to understand the intricacies of proprietary trading before it is undertaken.

Download Official Reading – National Australia Bank – FX Options