EBF 301
Global Finance for the Earth, Energy, and Materials Industries

Mini-Lecture: Risk Control

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Key Lessons Learned by Examining the Case Studies

There were some common themes that ran through each of these cases.

  • Single, or small groups, of “rogue” Traders (little supervision over the decision-making process).
  • The use of risky financial derivatives.
  • Lack of real accounting/auditing oversight and/or Trader(s) controlled these.
  • No trading policies, controls, etc., in-place.
  • “Hidden” trade losses.
  • Lack of executive knowledge and understanding of the inherent risks in trading.
  • Trading positions increased to lessen impact of losses led to increased exposure (so-called, “doubling-down”).

These events, along with others, prompted the financial industry to institute ways to monitor, track and stay on top of, financial derivative trading. These same methods would later have to be adopted by publicly traded energy companies in the US.

Key Learning Points for the Mini-Lecture: Risk Control

  • Severe losses by “rogue” Traders led to the establishment of controls for financial derivative trading in the banking and finance businesses.
  • These “risk measures” were later made mandatory for the energy industry.
  • Companies face more than just financial risk, such as legal, operational, credit.
  • Necessary risk controls, measures, reports and organizational structure.
    • “mark-to-market”
    • “Value at Risk”
    • “P&L”
    • Volumetric
    • Risk Control Group/Chief Risk Officer/Risk Oversight Committee
EBF 301 Risk Controls
John A. Dutton e-Education Institute