Rebuilding Trust at a Broker-Dealer After Exotic Options Losses
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June 10, 2025
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A broker-dealer experienced a significant multimillion-dollar loss due to unauthorized parameter changes by a trader to a valuation model for exotic options in its trading book. The changes, initiated by a single trader, escalated from minor alterations to substantial and damaging modifications, and remained undetected until the trader took a vacation. The company promptly informed regulators and engaged FTI Consulting for a comprehensive analysis of the impact.
Our Impact
- The broker-dealer gained clarity on where accountability broke down and was able to address control lapses across teams and functions.
- The company’s governance processes and the valuation framework were strengthened with targeted improvements tailored to the its structure and risk profile.
- Equipped the client with a clear, defensible analysis of the financial impact, the company was able to confidently engage with regulators and auditors.
Our Role
- FTI Consulting conducted a detailed forensic investigation into unauthorized model parameter changes, analyzing communications and systems and categorizing all related events and actors.
- We analyzed the timeline and scale of financial losses caused by the altered valuation parameters and subsequent hedge adjustments. We also verified the integrity of the current trading book’s valuation.
- We assessed systemic, procedural and governance failures that allowed the trader’s actions to go undetected, identifying control deficiencies across all lines of defense beside risk management.
- FTI Consulting delivered a robust set of recommendations for enhanced system controls, governance oversight, improved modeling and targeted training to mitigate future risks.
Published
June 10, 2025
Key Contacts
Senior Managing Director, Leader of Securities, Commodities and Derivatives
Managing Director