Below is a sum-up of the instances reviewed by the research worker to enable him to choose the instances for the instance survey. The instances selected were non summarised herein in order to avoid repeat. In add-on, for different grounds, non all instances may hold been reported and hence of import lessons might hold been lost. Therefore, it is really hard to cognize the full population of instances in which derived functions were blamed for jobs caused. Furthermore, as already noted these instances, although big in value merely stand for a little proportion of users and accountants of derived functions ( in size and value ) .
1. Aracruz Celulose S.A
Chris Lang ( 2009 ) , in an article in Bloomberg ( December 2008 ) , noted that Aracruz ‘s the Brazilian mush shaper, in 2008 reported losingss on the currency-derivatives amounting to US $ 2.13 billion. Barreto ( 2008 ) continued to observe, in a Reuters Article that this followed the company ‘s closing of the bulk of its exposure to toxic foreign exchange derived functions with a group of Bankss and that the company held currency frontward contracts with an mean work stoppage monetary value of 1.76 reais per dollar and mean adulthood of 12 months. With these contracts, the company agreed to pay duplicate the difference between the work stoppage monetary value and Brazil ‘s currency, when it was merchandising at weaker degrees than the work stoppage monetary value. As the existent value plunged against the dollar, the company ‘s losingss mounted.
Harmonizing to Barreto ( 2008 ) , Aracruz reached an understanding with certain nameless Bankss, which sold its foreign exchange derived functions in order to enable the restructuring of delinquent debts by wind offing 97 per centum of the contracts. Aracruz was one of several Brazilian companies that reported immense foreign exchange losingss when the state ‘s currency plunged against the dollar.
Barreto, ( 2008 ) , claims that what happened is that in 2007 the existent rose against the dollar by 20 per centum and once more by another 14 per centum in 2008 from early August. This prompted many companies to wager the currency would stay strong. “ Those stakes turned rancid as the convulsion in planetary markets deepened and concerns over a world-wide recession led to crisp capital escapes from emerging markets. The existent fell more than 27 per centum since making a nine-year high in early August 2008, doing monolithic currency losingss ” ( Barreto, 2008 ) .
Chris Lang ( 2009 ) in an on-line paper on ‘Pulp.Inc. ‘ provinces, that on 24 November 2008, the company held a Particular Shareholders Meeting “ with the engagement of representatives of 96.5 % of its vote capital. In this meeting they were to discourse a proposal for registering a duty case affecting Isac Zagury, the company ‘s former CFO. ” He notes that keeping people responsible for the muss might be a good thing. However, the lone ground anything had been done, was because the value of the Brazilian existent collapsed against the dollar. If this had non occurred, the board and the stockholders would non hold complained about the derivative trading, although they might hold known about these maltreatments of the derived functions investings. He argues instead cynically that this might be because they were doing money.
2. Showa Shell Sekiyu K.K.
One of Japan ‘s prima oil refiners and crude oil merchandises distributers. It forms portion of the Royal Dutch Shell Group, which holds a half of the interest in Showa Shell. In February of 1993, the company revealed that it had unfulfilled losingss of A?125 billion ( $ 1.05 billion ) brought about by bad foreign-exchange contracts amounting to $ 6.4 billion worth of stakes on the value of the dollar versus the hankering. This loss subsequently reached A?166.3 billion since there was a farther autumn in the U.S. currency ‘s value. Two leaders, resigned subsequently on in August of the same twelvemonth taking duty for the big loss on foreign-exchange hereafters contracts ( Reszat, 1998 ) . Harmonizing to Beate Reszat ( 1998 ) , the company wrote off these losingss over the following few old ages and compensated by selling securities and belongings to raise the necessary hard currency. The foreign exchange losingss went out of control because of the peal over of forward places, which was permitted and normal until April 1994 ( after which the Ministry of Finance changed the regulations ) . Accounting regulations ( in Japan ) allowed houses to conceal unfulfilled losingss by describing these trades at historical values.
In fact, as Reszat ( 1998 ) relates, in 1989, Soya Shell had started to purchase dollars frontward at an mean cost of A?145. When the yen/dollar rate fell it rolled over its place to prorogue colony so as non to uncover the losingss. In rule, this pattern could hold continued indefinitely if it were non for the rollover costs, which can go prohibitively high.
3. Kashima Oil
A medium-scale oil refiner disclosed an unfulfilled loss of A?152.2 billion ( $ 1.5 billion ) in April 1994 from merchandising in foreign currency derived functions. Hachiro Obata, who resigned from his station as foreman, took duty for this. Kashima refines imported oil for the Nipponese market ; the strong hankering meant that the inputs were less expensive and so the net incomes were higher. The company ‘s currency traders entered into adhering frontward contracts, which resulted in unfulfilled losingss of A?100 billion, by 1988. These losingss increased around the clip of the Iraqi invasion of Kuwait in 1990. In expectancy of future purchases of oil, Kashima Oil did, what many other Nipponese trade good importers did, and increased their dollars retentions. When the dollar fell, so did the house ‘s expected net incomes ( The Economist ( US ) , ‘Determined Loser ( Kashima Oil ) ‘ , 1994 ) .
The house said it would sell A?100 billion worth of belongings and securities to do up for this loss. Four parent houses ( Kashima is unlisted ) were expected to convey in new capital and a group of 29 Bankss, which included the Industrial Bank of Japan, Kashima ‘s chief bank, helped. This taught Japan ‘s company treasurers a lesson. Currency equivocators were now exchanging from forward contracts ( which carry the hazard of great losingss if the currency moves the incorrect manner ) to options ( which do non lock the purchaser into a loss-making place ) . Company chiefs began to understand the demand to command bargainers even more closely. Besides, as noted in the instance of Showa Shell Sekiyu K.K. , in April 1994, the Ministry of Finance banned rollovers on new forward contracts and stated that bing places were to be unwound every bit shortly as possible. This was further enforced by a new ministry directing issued in 1995 insistence that historic places are to be unwound by March 1995 at the terminal of that fiscal twelvemonth ( The Economist ( US ) , ‘Determined Loser ( Kashima Oil ) , 1994 ) .
4. Groupe Caisse d’Epargne
A common nest eggs bank suffered a a‚¬600 million ( $ 807m ; ?466m ) derivatives trading loss ( unauthorized trades for the bank ‘s ain history ) in October 2008, which it blamed partially on the high market volatility at the clip. Saltmarsh ( 2008 ) noted that the spokeswoman indicated that the derived functions involved were based on equity indexes. She added that, the bank ‘s operating company, Caisse Nationale des Caisses d’Epargne would compose off the loss. The bank ‘s internal hearers discovered the places.
The group of employees responsible for doing the unauthorized trades were dismissed. Saltmarsh ( 2008 ) noted that harmonizing to a spokeswoman, a squad of “ around six bargainers ” from the proprietary desk was responsible for the trades and that they had been suspended pending enquiries.
In a statement, the bank said that the losingss would non endanger its fiscal viability or impact its clients. The bank, which is unlisted, added that it retained more than a‚¬20 billion in stockholder equity ( Saltmarsh, 2008 ) . It blamed the “ utmost volatility ” in the markets in the hebdomad of 6th October for the incident. Harmonizing to the BBC News article ( 2008 ) , a Caisse d’Epargne spokesman said a “ little squad ” had caused the loss, which had been sanctioned for transcending its trading hazard bound. The bank said that it had sacked one of the helpers to the finance manager Julien Carmona ( BBC News, ‘French bank admits merchandising loss’2008 ) .
5. Sadia S.A.
a major Brazilian nutrient manufacturer founded in 1944. It is among the universe ‘s prima manufacturers of frozen nutrients, and is Brazil ‘s chief exporter of meat-based merchandises. The Company operates distribution Centres in Brazil, Argentina, Chile, Uruguay, Paraguay and Bolivia, and representative offices in the United Kingdom, Italy, Japan and Dubai. Its portions trade on the Sao Paolo Exchange and its American Depository Receipts ( “ ADR ‘s ” ) trade on the New York Stock Exchange under the symbol “ SDA ” .
The Company ‘s disclosed a loss of about R $ 760 million ( $ 410 million U.S. dollars ) emanating from stakes on currency derived functions that went bad. This prompted a immense sell-off of 37 % of Sadia portions in a individual trading session, pass overing out more than $ 800 million in market capitalization. Consequently, the Company decided to neutralize in progress certain fiscal minutess, ensuing in losingss of about R $ 760 million ( $ 410 million U.S. dollars ) .
Harmonizing to Sadia this loss was caused because of minutess carried out that were bad in nature, unrevealed and larger than necessary ( that is minutess non carried out so as to fudge the activities of the company exposed to interchange fluctuation ) . The minutess were non consistent with publically disclosed hedge patterns of the company ( the contracts covered export-forward exposure from 12 months ‘ worth of gross revenues when the policy called for merely six months ‘ worth of coverage ) .
Furthermore, Sadia ‘s policy stated that it engaged in derivative contracts in currency markets entirely in order to fudge market hazards and these hazards were suppose to be closely monitored ( that is measured consistently through an analysis of Value at Risk or VAR ) . However, it was noted that the Company ‘s fiscal statements failed to account for the company ‘s monolithic exposure to currency market fluctuations ( that the company had declared less than $ 150 million of exposure in these instruments ) and the Company lacked equal internal and fiscal controls.
As a consequence of this dirt the CFO was instantly dismissed and the Chairman and Vice Chairman resigned from their stations ( Bernstein Litowitz Berger & A ; Grossmann LLP Attorneys at Law, 2009 ) .
6. China Aviation Oil ( Singapore ) Corporation Ltd ( “ CAO ” )
This is the largest buyer of jet fuel in the Asia Pacific part and the cardinal provider of imported jet fuel to the civil air power industry of the People ‘s Republic of China ( “ PRC ” ) . The company caught public attending in 2005 when it was embroiled in a trading dirt, affecting its head executive Chen Jiulin ( subsequently arrested with the charge of insider trading, and was sentenced to 51 months imprisonment ) . The losingss from the dirt cost up to $ 550m and the subsequent prostration of the company.
Derived functions were at first being used to fudge its hazard inherent in its primary concern of physical oil procurance and trading. However, taking the position that the market monetary value for oil would go on tracking upwards, CAO subsequently entered into bad option trades where its purpose was to gain from favorable market motions.
It purchased calls and sold puts, thereby efficaciously making a geared long place. As oil monetary values increased, the purchased calls were exercised and net incomes were made. The sold puts were non exercised and the company gained from the premiums. However, in the 4th one-fourth of 2003, Chen Juilin changed scheme and signed contracts with a figure of Bankss, theorizing on a command on the oil monetary value for $ 38 per barrel. He believed that the oil monetary value would non travel above that monetary value. It closed 2003 with a short place holding sold calls and bought puts. However, oil monetary values did non diminish and there was a big addition over the speculated command monetary value by October 2004. This left CAO confronting important border calls on its unfastened ( short ) derivative places.
As noted in the PRIMIA Professional instance surveies subdivision ( n.d. ) , harmonizing to a CAO imperativeness release dated the 30 November 2004, ‘it was unable to run into some of the border calls originating from its bad derivative trades, ensuing in the company ‘s being forced to shut the places with some of its counter parties ‘ . In the same imperativeness release, CAO announced that the accrued losingss from these closed places amounted to about US $ 390 million. In add-on, the company had unfulfilled losingss of about US $ 160 million, conveying the entire derivative losingss to $ 550 million. Furthermore, it was besides noted that Chen Juilin and other senior executives had for some clip manipulated the company ‘s fiscal statements to hide the losingss ( PRIMIA, n.d. ) .
7. Union Bank of Switzerland ( UBS )
The bank announced equity derived functions losingss of 625 million Swiss francs in 1997. This forced the amalgamation with Swiss Bank Corp, writing-off another 760 million Swiss francs for the equity derivatives losingss after the amalgamation in 1998 ( Schutz 2009 ) . Schutz ‘s ( 2009 ) in his book ‘The Fall of the UBS: The Reasons Behind the Decline of the Union Bank of Switzerland ‘ , histories for how Goldstein – the adult male behind the equity derivatives traffics – set up a planetary equity derived functions ( GED ) group which was outside the bank ‘s hazard direction controls. He earned really big net incomes for the bank, and fillips for himself, which went into multimillions of dollars. He relates that UBS created two separate and overlapping hazard control maps and both of which reported to the caputs of concern units, instead than to the bank ‘s senior direction. These big net incomes, and the built-in struggles of involvement within the bank, helped insulate Goldstein from any attempts to command his trading group:
There was strong acknowledgment of the job – and there were programs to turn to it – but the attempt was excessively small excessively tardily. While the bank was traveling toward developing an independent construction, the GED was forcing in front and doing money ( Schutz, 2009 ) .
However, Dick Schutz ( 1998 ) notes that there was no indicant that Goldstein ‘s co-workers suspected him of illegal traffics or unethical behavior. They described him as a professional who abided by the regulations. To his co-workers he appeared to move within the bounds of recognized pattern, even though this was non the instance. He was besides aggressive in recognizing income on complex, long-run trades, where net incomes could be booked up front on everything without seting up the proper militias. It seems that person like the hazard directors or other accountants could hold stopped him. However, cipher did. Schutz ( 1998 ) described the state of affairs at UBS as being ‘a complicated narrative affecting power, aspiration and amour propre. ‘
The investing banking unit of Paris-based Credit Agricole SA, France ‘s second-largest bank, showed losingss of a‚¬250 million ( US $ 320 million ) on 18 September 2007. These losingss – which were the cost to wind off the unauthorized places – were blamed on Richard Bierbaum, a Credit Agricole CIB New York bargainer. He was subsequently fired, with five of his higher-ups, for taking places beyond his mandate and deputing on trades on indexes linked to derived functions ( that is credit-default barters that would gain if the Federal Reserve cut involvement rates, doing investor perceptual experience of recognition quality to better ) ( Paulden et al 2007 ) . Paulden et Al ( 2007 ) note that the bargainer said that his foremans knew what he was making and considered him a “ aureate kid ” ‘ of the New York office and places were reported on a day-to-day footing.
9. CODELCO ( Corporacion Nacional del Cobre de Chile or, in English, the National Copper Corporation of Chile )
The Chilean State owned Cu excavation company was a victim of a derived functions desk without proper constructions and controls. CODELCO reported trading losingss of $ 207 million, made up of $ 164 million in Cu, $ 31 million in Ag and $ 12 million in gold when the books were drawn-up in January 1994. Former caput bargainer, Juan Pablo Davila, was blamed for $ 30 million lost when he made a computing machine mistake and bought alternatively of sold hereafters contracts at the London Metals Exchange ( LME ) . Davila so tried to do up the loss by shorting one million dozenss of Cu ( 40,000 LME contracts ) or more, wagering the metal would travel down and speculated in gold and Ag on the Commodity Exchange of New York. Copper hereafters rose about 10 cents per lb from September 1993 to January 1994. The controls of the company failed since the guidelines were breached that merely permitted Davila to lose a upper limit of $ 1 million and limited his cyberspace places to 20,000 dozenss of Cu ( or 800 LME contracts ) . After the company fired Davila, his direct higher-ups resigned including the senior frailty president of selling, the gross revenues director and his deputy ( All Business, 1994 ) .
10. National Westminster Bank Plc
On 28 February 1997, NatWest Markets ( NWM ) , the corporate and investing banking arm of one of the UK ‘s major Bankss, exposed a GB?50 million loss, in its trading books of involvement rate options and swaptions. Following probe this loss figure was increased to GB?90.5 million. The jobs commenced because of a systematic mispricing of a figure of options and swaptions by its rate hazard direction group bargainers. The bargainers, Kyriacos Papouis, who traded Deutschemark ( DEM ) and his superior, Neil Dodgson, who traded Sterling ( GB? ) , began to mismark places in options, in the bank ‘s books in a attempt to cover up the losingss made. It was subsequently noted by regulators at the clip, the Securities and Futures Authority ( SFA ) ( now the UK Financial Services Authority ( FSA ) ) that they lacked the due accomplishment, attention and diligence to transport out the undertaking. Following the find of the losingss, Papouis, who by so moved on to Bear Stearns and a few senior directors, including Dodgson resigned. The internal controls and hazard direction were criticised and questioned and the regulator imposed a punishment of ?420,000. Papouis and Dodgson, were fined and reprimanded for breaches of SFA rules. This instance is a authoritative illustration of the hazard that sophisticated pricing and hazard direction theoretical accounts pose on today ‘s modern Bankss. The SFA said that a clear instance of mispricing went undetected by hazard direction for about a twelvemonth and they did non descry the screen up of losing places, chiefly because of non-compliance with internal minimal control criterions ( Ambit Erisk, 2001 ) .
11. MF Global
Officially known as ‘ ” Man Financial, ” and a major planetary fiscal derived functions agents, announced a bad debt proviso amounting to $ 141.5 million. This proviso was the consequence of unauthorized trading by a representative in a MF Global subdivision office, who on 27 February 2008, while trading in the wheat hereafters market in his personal history, well exceeded his authorized trading bound. MF Global was fined $ 10 million by the CFTC over the incident and an unrelated Natural Gas incident from 2003 and $ 495,000 by the CME Group over the wheat incident. Evan Dooley, who made populating trading trade goods like wheat in his place province, Tennessee, was accused by MF Global of doing unauthorized trades that led to this loss. Dooley, the house said, wagered on wheat hereafters with money he did non hold. He had bought every bit many as 15,000 wheat hereafters, the equivalent of about 10 per centum of the market for these contracts for any given month. When MF Global discovered the trades, Dooley was dismissed and they ran up the losingss to urgently wind off the places in a volatile market. MF Global has an electronic system designed to forestall agents from merchandising beyond their agencies. However, the precautions failed because they had oddly been deactivated for certain bargainers, including Dooley. The ground stated was because the controls slowed minutess ( Grynbaum, 2008 ) .
12. Morgan Stanley
America ‘s second-biggest securities house was yet another fiscal services group who fell victim to a knave bargainer, purportedly the London-based Matt Piper in 2008. They admitted to suspending the recognition bargainer in London for seeking to hide losingss of approximately $ 120 million ( ?61.3 million ) . The FSA had been carry oning a full probe into the behavior of an nameless employee, when it uncovered a $ 120 million negative accommodation to Markss. The accommodation had been antecedently taken in a bargainer ‘s book that did non follow with the house ‘s policies. This related to short-run trading in recognition index options that may hold dated back to the twelvemonth earlier. The trades were believed to hold been in CDX indices, complex derived functions used to fudge hazard on recognition investings such as bonds ( Bawden, 2008 ) .
13. CITIC Pacific
In October 2008, a Beijing-backed steel-to-property pudding stone, announced $ 2 billion in losingss from unauthorized stakes on volatile forex markets. The company finance executives made unauthorized trades on the value of the Australian dollar and euro. The house entered into contracts, known as “ collectors, ” which allow investors to go out if the currency they are wagering on strengthens, but non if it depreciates. “ An ‘accumulator ‘ is a type of derivative contract in one signifier, an investor agrees to purchase a specified sum of currency at a fixed monetary value which frequently represents a price reduction to the topographic point market ” ( Santini, 2008 ) . Before Citic Pacific ‘s loss became known, “ collectors were planted like land mines throughout the investing landscape. Among hedge financess and fiscal investors that signed these bad contracts exposure, fudging agreements were made to lock in maximal hazards. ” Market analysts argue that Citic Pacific signed an collector contract, when the Australian dollar ‘s ( AUD ) value was on the rise. This contract set high additions, which did non include a floor for losingss. The hazards on it were hard to gauge since the contract ‘s pricing theoretical account was a complex one.
Citic Pacific made money, as the exchange rate increased above 1 ( AUD ) to 0.87 U.S. dollars ( USD ) . However, although the U.S. currency weakened since the start of 2008, market participants still made incorrect stakes on the exchange, believing that the AUD would go on to turn stronger. The company ‘s losing place, could hold been reversed if the latter happened. However, they decided to tag to market the collectors and other derived functions and wind off some derived functions contracts, recognizing losingss of HK $ 807.7 million ( US $ 104.2 million ) in December that twelvemonth. Citic Pacific had besides held similar contracts linked to the value of the euro and Chinese kwai ( Santini, 2008 ) .
It was noted by Michael Edward ( 2004 ) in his online article, ‘Fraudulent U.S. Bank Derivatives Behind Parmalat ‘s Insolvency ‘ , that the Italian nutrient group active in milk, dairy merchandises and fruit-based drinks, held an estimated US $ 17 billion of financess which could non be accounted for. These financess have been chiefly attributed to a complex and hazardous derived functions based on valueless bonds founded through offshore shell companies. Since the twelvemonth 1997, the company has engaged in geting several concerns from the South and North America. These resulted in debts with fiscal establishments including JP Morgan Chase, Bank of America, and Citicorp ( these held the highest sum of derived functions ) . By 2001, the losingss became progressively evident and the Bankss ab initio used interest-rate barters to protect themselves from the losingss. However, the hazardous guess on involvement and exchange rates increased the losingss even further. In this visible radiation, the Bankss implemented a Ponzi strategy with derived functions that they brokered to other fiscal establishments and investors ; all based on valueless Parmalat bonds. This efficaciously served as the means through which they could conceal the debts and losingss. Thingss grew even worse as greed took over and the Bankss shifted the full incrimination onto Parmalat. The same Bankss that victimised Parmalat and many other investors, that had rated the Parmalat derivative-based bonds as “ sound fiscal paper ” and helped with this cozenage. The Bankss continued to broker these derivatives-based on other worthless bonds because of the falsely created paper ( Edward, 2004 ) .
Michael Edward ( 2004 ) continued to observe that former Parmalat CEO Tanzi stated to Italian prosecuting officers that, “ [ the deceitful bond system ] was to the full the Bankss thought. ” Parmalat ‘s former fiscal director, Fausto Tonna, following a proposal made by the Bank, had altered the books to supply a bogus security for the bonds ( Edward, 2004 ) .
In June 2003, Luca Sala, who arrived from Bank of America ( BOA ) was appointed as the new board Director. Edwards ( 2004 ) noted that BOA announced that a Parmalat history purportedly deserving $ 3.9 billion did non be in order to conceal the deceitful bond-based derived functions. This made the Parmalat insolvency populace. Furthermore, at the same clip Alberto Ferraris from Citibank was appointed the as fiscal director at Parmalat ( Edward, 2004 ) .
15. National Australia Bank
In January 2004, the bank lost 100s of 1000000s of dollars in unauthorized foreign currency derived functions. This exposure cost the bank A $ 360 million, and wiped out about A $ 2 billion from bank ‘s market capitalization. Following this event, many senior staff members lost their occupations, the board was restructured and the Chairman, Charles Allen, and the Chief Executive, Frank Cicutto, resigned. The bargainers Luke Duffy, David Bullen and Vince Ficarra in Melbourne and Gianni Gray in London, subsequently deemed as “ knave bargainers ” , were dismissed and were investigated by the Australian Federal Police. In October 2003, the bargainers at NAB were merchandising extremely leveraged call options on the Australian and New Zealand dollar in the expectancy that these currencies would fall against the US dollar. However, these currencies went in the opposite way from that expected and NAB were losing 1000000s of dollars every twenty-four hours. Alternatively of shuting off the places, the bargainers doubled their stakes in order to retrieve initial losingss. They besides entered fabricated currency minutess in the bank ‘s books to cover up their losingss. These fabricated minutess and trading bound breaches were non detected by internal controls. It was merely some months subsequently that a chap alerted direction when disagreements were noticed in trading histories ( Singh, n.d. ) .