NAB chief admits weaknesses

"The foreign currency options traders exploited weaknesses in our internal procedures," said Cicutto, in explaining how the traders were able to enter fictitious trades into the bank’s systems.

"We have identified those weaknesses and have closed them," he said, in an interview published on the bank’s website on Friday.

Cicutto played down media reports that the bank’s final bill for unauthorised forex options trading could be as high as A$600 million (US$467 million) – up from its current estimate of A$185 million.

But that did little to dampen speculation in the market that the final losses are likely to soar once NAB completes a full revaluation of its options portfolio. While the bank has said the unauthorised trading activity was solely in Australian and New Zealand dollar options, traders reported that NAB’s options team had been particularly aggressive in euro call options that may prove to be linked to the ongoing inquiry.

One market source speculated that the weak internal procedures mentioned by Cicutto may have enabled the traders to create trades between two internal books - one for exotic options and one for vanillas. Internal fictitious trades would be much harder for risk managers to detect than trades created with outside counterparties.

The full extent of NAB’s losses will become clear this week when the bank announces the results of the revaluation.