As a fictional example, a bank employee entered a derivative trade with a customer into the bank's system the wrong way around, reversing the buy and sell direction. No one noticed the error, and a loss arose. The capital adequacy notice for banks (the Notice) classifies operational risk loss events into seven types. Which type does this loss fall under?
Quiz: Operational Risk
Last reviewed: October 5, 2026
This is a draft, shown for review before publication.
6 questions to check your understanding of the chapter “Operational Risk”. Choose an answer and select “Check answer” to see the answer and explanation. You can also open “Answer and explanation” to see the answer first.
Question 1
Answer and explanation
Answer: C
An error in trade capture is a failure in transaction processing, so it falls under "execution, delivery and process management." The Notice defines this type as losses from relationships with counterparties and vendors, and from failed transaction processing or process management. In derivatives business, failures in transaction processing, such as trade capture, reconciliation of trade confirmations and settlement, fall under this type.
"Internal fraud" covers losses from fraud, misappropriation of property, or acts intended to circumvent regulations, laws or internal rules, involving at least one officer or employee. An employee was involved here, but the employee only made an entry error and did not act with the intent to circumvent anything, so this type does not apply.
"Business disruption and system failures" covers losses when systems stop or process data incorrectly. In this example, the system recorded exactly what was entered, and the error lay in the person's entry. "Clients, products and business practices" covers losses from a negligent failure to meet obligations to specific clients (such as suitability) or from the nature or design of a product. The counterparty was a customer, but an entry error does not fall under this type.
Learn more: Operational Risk in Derivatives
Question 2
Which statement about how a bank calculates its operational risk amount under the standardized approach is incorrect?
Answer and explanation
Answer: B
A bank with a BI of 100 billion yen or less may use an ILM of 1. Such a bank uses 1 if it does not meet the loss data criteria. Such a bank is not required to calculate the ILM from its loss experience, so the statement that it cannot use 1 is incorrect.
Under the standardized approach, the operational risk amount is the business indicator component (BIC), derived from the business indicator (BI) that measures business size, multiplied by the internal loss multiplier (ILM), which reflects past loss experience. For a bank that calculates the ILM from its loss experience, the amount rises as losses grow relative to the size of the business.
The standardized approach was introduced with the Basel III finalization, which also abolished the internal model approach for operational risk. Calculating the amount with an internal model is not allowed.
Learn more: Operational Risk in Derivatives
Question 3
As a fictional example, a bank entered into an FX forward with a customer to sell USD 2 million in three months at 150 yen per dollar. A staff member booked it as a purchase by mistake, and the bank sold the same amount in the market on the same day on the same terms to offset the long position in its records. No one noticed the error before the settlement date. If the rate on that date is 152 yen per dollar, what is the profit or loss on the bank's actual position?
Answer and explanation
Answer: C
The actual position loses 8 million yen. The trade with the customer is in fact a sale of USD 2 million, and the trade in the market is also a sale of USD 2 million. Together, the actual position is a short position of USD 4 million. On the settlement date, the rate is 2 yen higher than the agreed 150 yen per dollar. The bank sells dollars 2 yen below the market, so the loss is 2 yen × USD 4 million = 8 million yen.
Zero yen is the profit or loss on the recorded position. In the records, the long position of USD 2 million is offset by the sale of USD 2 million, so the position looks like zero. It differs from the actual position by USD 4 million, and until the error is found, the actual position sits outside risk management. A loss of 4 million yen counts only one of the two sales of USD 2 million (2 yen × USD 2 million). A profit of 8 million yen gets the direction wrong for a rise in the rate.
Whether the bank gains or loses depends on market moves. If the rate on the settlement date is 148 yen per dollar, the bank sells dollars 2 yen above the market, and it gains 2 yen × USD 4 million = 8 million yen.
Learn more: Booking Errors and Confirmation Mismatches
Question 4
As a fictional example, a trader at a bank did not enter a trade made with a counterparty in the bank's system. The trader sent the confirmation to the counterparty personally, threw away the copy, and had the counterparty's confirmation sent to the trader personally, building up a position the firm did not know about. At this bank, confirmation work is based on the trades recorded in the bank's system. Which control would detect this fraud?
Answer and explanation
Answer: A
If a unit independent of the trading unit receives and checks the counterparty's confirmations, this fraud comes to light quickly. The counterparty's confirmation arrives from the counterparty even if the trade is not in the bank's system. The independent unit tells the counterparty about confirmations that do not match the firm's records, or that cover trades the firm has no record of, and checks them.
Having the back office send confirmations and having senior management receive the number of unconfirmed trades are also controls on confirmations. However, under the conditions in the question, this bank's confirmation work is based on the trades recorded in its system. Because this trade was never entered in the system, the back office has no confirmation to send for it, and it is not counted among the unconfirmed trades. Neither control would bring the trade to light.
Learn more: Booking Errors and Confirmation Mismatches
Question 5
In the rogue trading case at Barings, the UK bank that collapsed in 1995, what method did the trader at the Singapore subsidiary use to hide loss-making trades?
Answer and explanation
Answer: B
The Barings trader hid the trades through an account numbered "88888," opened in July 1992. In the internal systems, it was registered as an account for handling trading errors, and the trader had the system changed so that this account was left out of the reports on market trading. The trader also recorded trades that did not exist, to make his daily positions and the margin owed to the exchange look smaller.
Selling securities held in custody to cover losses happened in the 1995 case at Daiwa Bank's New York branch (trading in US Treasury securities). Internal futures trades with the counterparty recorded only as "internal" belong to the 2011 case at UBS's London branch (trading in equity index futures).
Learn more: Rogue Trading Cases: Barings, Societe Generale and Others
Question 6
As a fictional example, a company due to pay 10 billion yen to a counterparty on the settlement date paid 2 days late because of an operational error, resulting in a settlement fail. The counterparty borrowed replacement funds for 2 days at 1.8% a year (calculated on a 360-day year). What does the FX Global Code ask of the party that did not pay on the due date?
Answer and explanation
Answer: D
When a settlement fail is found, the Code asks the party that did not pay on the due date to arrange for the correct amount to arrive or to pay the cost of compensation. The counterparty's cost is 10 billion yen × 0.018 × 2 ÷ 360 = 1 million yen (10 billion yen × 0.018 = 180 million yen, and for 2 days that is 180 million yen × 2 ÷ 360 = 1 million yen). A settlement fail arises from operational errors as well as from a counterparty's default.
Reading the rule as applying only when the counterparty has defaulted is wrong because it excludes delays caused by operational errors. The 180 million yen is the interest for a full year, not converted to 2 days. Bearing 1 million yen as its own cost is the position of the party that was waiting for the payment. If the counterparty had been late, the company would bear the extra 1 million yen and be the party seeking compensation. The same delay can mean bearing a cost or claiming compensation, depending on who made the error.
Learn more: Settlement Failures and Reporting Errors