Wednesday, December 8, 2010

Auditing Derivatives: Think of what can go wrong -- Risk Management

This article appeared in The Malaysian Accountant journal, Sep-Oct 2010 issue

By Jasvin Josen

Being in the Risk Management unit of an Investment Bank can be very overwhelming, let alone auditing this function. The term itself carries unpleasant reminders of past crisis; Barings, LTCM and Orange County of the 1990s; AIG, Bear Stearns and Lehman Brothers of 2008. All of these disasters seem to directly implicate the Risk Management Group. 

The Risk Management group is quite different from the Trading Floor and Controlling Group discussed in the last two issues. Some companies associate the function with recovery and disaster procedures. However in an investment bank, risk management is far more encompassing.

According to the International Financial Risk Institute (, risk management provide four important functions:
§    to protect the firm against market, credit, liquidity, operational, and legal risks;
§    to protect the financial industry from systemic risk;
§    to protect the firm's customers from large non-market related losses (e.g., firm failure, misappropriation, fraud, etc.); and
§    to protect the firm and its franchise from suffering adversely from reputational risk.

In auditing this function, one should avoid the temptation to get pulled in all directions. It is always useful to

The Crash of 2:45 - Lessons Learnt

This articles appeared in The Edge, Malaysia: Nov 1-6, 2010

By Jasvin Josen
The previous article highlighted the events that brought on the shortest lived stock market crash in American history. There are invaluable lessons to be learnt from the crash and this article will discuss some of the notable ones.
The dark side of Automated Electronic Trading
Electronic trading was developed in the late 1980s and has turned into a market necessity today. During May 22-26, 2010, program trading was 60.8% of NYSE average daily volume. (source: Exchanges are competing with each other for the fastest processing times to complete trades. In June 2007, the London Stock Exchange introduced “TradElect” (although it was

The Crash of 2:45 - An Autopsy

This article appeared in Corporate page of The Edge Malaysia, Oct 30 – Nov 6,2010

By Jasvin Josen

High Frequency Traders. Flash Trades. Algorithmic Trading. – these uncommon phrases have suddenly become familiar in the news since the May 6 “flash crash” that occurred at 2:45 pm and ended twenty minutes later.

It later turned out that the crash was actually sparked by a $4.1bn sale of stock index futures by a single institutional investor. On Oct 1, the U.S. Securities and Exchange Commission (SEC) and the U.S. Commodity Futures Trading Commission (CFTC) provided an in-depth analysis of what actually happened that day, in a 104 page report (referred as “the Report”)

This article will describe the chronology of events which brought on the biggest one-day point decline (998.5 points) on an intraday basis, in Dow Jones history.

9:00 A.M.
On the morning of May 6, 2010, New Yorkers woke up to adverse news on the European debt crisis that had been looming all afternoon across Europe. The market was demanding higher premiums for bearing additional risk. CDS premiums rose on some European sovereign debt while the Euro was suffering a downward pressure.

1:00 P.M.