First place in the Managing Risk Category, in the 2005 European Foundation for Management Development (EFMD) Case Writing Competition

Allied Irish Banks - The Currency Derivatives Fiasco

Allied Irish Banks - The Currency Derivatives Fiasco
Case Code: FINC032
Case Length: 11 Pages
Period: 1997 - 2004
Pub Date: 2004
Teaching Note: Not Available
Price: Rs.500
Organization: Allied Irish Banks
Industry: Banking
Countries: Ireland, US
Themes: Risk Management
Allied Irish Banks - The Currency Derivatives Fiasco
Abstract Case Intro 1 Case Intro 2 Excerpts


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...

The End Result

After the fraud was discovered, AIB undertook a thorough investigation into the foreign exchange trading operations at the Baltimore headquarters of Allfirst.

The investigation was led by Eugene A. Ludwig, an eminent US banking figure. Ludwig disclosed his findings in a report (Refer Exhibit III), which blamed the weak control environment at Allfirst for the fraud. Alfred J.T. Byrne, the chairman of the financial institutions practice at LeClair Ryan, a Richmond-based law firm said, "The Ludwig report makes clear that some of those responsible for compliance with internal controls at Allfirst were asleep at the switch. One has to wonder whether the lights were out at Citi or Bank of America on these transactions as well." Following the report, AIB discontinued all foreign exchange trading operations in Allfirst with the exception of customer service obligations...


Exhibit I: The AIB Group
Exhibit II: The Value At Risk (VAR) Model
Exhibit III: Main Findings of the Ludwig Report

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