Financial Strategy, Second Edition

11

Currency Exchange Trading and Rogue Trader John Rusnak

Sharon Burke

INTRODUCTION

In 1993, a foreign currency trader, John Rusnak, was hired by Allfirst bank in Maryland. John Rusnak was hired to bring profits to Allfirst via proprietary foreign exchange trading. Prior to Rusnak's arrival, foreign exchange trading at the bank was limited to assisting bank customers in hedging against currency risk. Allfirst performed this service for companies that were dealing with overseas trades.

This decision would eventually incur a $691 million loss for Allied Irish Bank, the owner of Allfirst bank. The story of this loss involves foreign exchange trading, bank organization, organizational politics, inadequate accounting controls and more. This article will include a review of foreign currency trading concepts, the strategies that Rusnak employed to trade and to cover his losses and the findings of the subsequent investigation by Eugene Ludwig.

CURRENCY MARKETS

The foreign currency market is virtual. That is, there is no one central physical location that is the foreign currency market. It exists in the dealing rooms of various central banks, large international banks, and some large corporations. The dealing rooms are connected via telephone, computer and fax. Some countries co-locate their dealing rooms in one centre. The Eurocurrency market is one example of where borrowing and lending of currency takes place. Interest rates for the various currencies are also set in this market.¹