Derivative Trading - prone to abuse, fraud

As little - or even no - cash changes hands when transactions in derivatives (especially those conducted " Over-the-Counter") are executed they require even more oversight than transactions in securities that are cash-settled within a very short time span. Malpractice can easily be hidden from compliance and audit departments - even if these are not complicit in any misconduct or fraud. Often staff in these units are of lower status, less well paid and less well versed in the intricacies of the instruments involved. OTC derivatives are by nature traded by appointment and the correct pricing is not easy to verify - even with the best intentions of any supervisors. So it is quite easy to build in a margin for those that want to skim some money off the transactions they conduct. That the dealing community fights every proposal to bring all transactions online and onto exchanges raises doubts about the sincerity of their motives in doing so. Reports about the conditions in the dealing department of Monte dei Paschi di Siena illustrate these problems poignantly. (Reuters)