medium · FRM Part 2 Risk & Investment Management
A large multi-strategy fund uses an 'Internal Settlement Account' to move cash between different sub-strategies before reconciling it with the prime broker at the end of the week.
What is the primary operational danger identified in the Barings case related to this practice?
- It violates the Basel III Liquidity Coverage Ratio (LCR) requirement, mandating banks hold enough cash for a 30-day stress period.
- The fund forfeits interest income whenever cash sits idle in a non-interest-bearing internal settlement account overnight, before reconciliation.
- The 'Error Account' or internal settlement account can be used to hide losses and fictitious trades if not reconciled independently and daily.
- Counterparty credit risk on the bank holding the settlement account, which is unrelated to how the fund internally tracks and reconciles its own trades.
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