The lack of operational oversight gave Sumitomo’s copper trader the autonomy to execute large highly-levered transactions in the spot market. The large trades in the both the spot and futures market should have required the approval of a supervisor who was informed about the trader’s strategies and competent to understand them. The trader’s broad authority allowed him to manipulate the reporting system and thereby hide his huge losses. Model risk is the risk that a hedging or pricing model is flawed, which is not pertinent in this case. |
