To quickly note another example of deliberate mispricing by a trader in a financial institution: the FT reports that the Hong Kong Securities and Futures Commission has just fined Merrill Lynch $450,000 after a managing director based in HK deliberately "mismarked a trading book of illiquid securities."
Per the report:
"For almost a year – from December 2007 to October 2008 – the director illicitly gained access to the US investment bank’s computer systems and changed the pricing parameters on a book of exotic options"
As always, it remains a really bad idea to put the traders in charge of marking their own books...and, as always, it raises the question as to why the Merrill Lynch product control group in the back office was unable to challenge the trader's marks - over the course of an entire year. Systems access rights seem to be an issue.
We will let our readers connect the usual dots when thinking of a hedge fund administrator marking illiquid securities.
Hedge Fund Operational Due Diligence
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