Rusnak's fraudulent trading strategy revealed

The report says Rusnak lost the vast majority of his $691 million losses from yen-dollar currency forwards. In 1997 Rusnak began trading based upon the assumption that the value of the yen would strengthen against the dollar. When the yen’s relative value continued to slide, so too did Rusnak’s forwards positions.

To hide his trading losses, Rusnak created bogus options that capitalised on weaknesses in Allfirst’s internal regulation and allowed the bogus options to be placed onto Allfirst’s books. He simultaneously entered two false trades – one being the sale of a deep-in-the-money put option on yen and the other being the acquisition of a similar option. Both fake options involved the same currency and the same strike price, and appeared to leave Allfirst with no net cash exposure.

However, the option involving the receipt of a premium would expire on the day it was written, while the other option would expire at some point in the future, usually in one month. Despite the fact that the differences in the tenors should have led to a price difference in the premiums for these options, the trades were not found to be suspicious by Allfirst's regulators. Also, nobody noticed that deep-in-the-money options were never exercised.

Rusnak’s fraud exploited Allfirst’s regulatory systems, which did not report expiring one-day options. He also managed to convince the back office that as Allfirst had no net cash position on the trades, they did not need to be confirmed.