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  • Writer's pictureWilliam Webster

The NatWest Mispricing Scandal: Where Valuation Went Wrong


The NatWest mispricing scandal of the late 1990s is a seminal case in the annals of financial trading misdeeds. It involved the investment banking division of National Westminster Bank (NatWest Markets) incurring a staggering £85 million loss due to the mispricing of interest rate options. This incident is a potent reminder of the dire consequences that can arise from inadequate oversight, flawed valuation practices, and a lack of ethical rigour in financial markets.

The Unfolding of the Scandal

Initially perceived as a £50 million loss, it soon transpired that the actual deficit at NatWest Markets was much more substantial. The heart of the issue lay in the traders manipulating the volatility figures used in option valuations, leading to grossly inflated prices.

Manipulation of Volatility Figures

The crux of the scandal revolved around the traders' manipulation of volatility figures in valuing options. By inputting erroneous or inflated volatility data into their pricing models, the traders were able to artificially boost the value of the options. This not only misrepresented the financial instruments' actual worth but also skewed market perceptions and dynamics.

Ethical Implications and Market Repercussions

The actions of NatWest Markets' traders underlined a stark ethical breach. Their conduct not only resulted in substantial financial losses but also damaged the bank's reputation and integrity. This episode starkly illustrates how unethical behaviour in financial trading can have far-reaching and detrimental consequences.

Critical Lessons in Risk Management and Oversight

One of the key takeaways from this scandal is the vital importance of segregation in roles and rigorous oversight in financial institutions. The lack of independent checks on the valuation processes and the autonomy granted to traders in valuing their own positions led to a significant lapse in risk management. It highlighted the necessity for stringent model oversight and the segregation of duties within financial organisations.

Regulatory Response and the Need for Reform

In response to such malpractices, regulatory bodies often tighten financial reporting and valuation rules. The NatWest case likely spurred reforms to enhance the management and reporting of complex financial instruments, emphasising the need for more robust internal controls and compliance measures.


The NatWest mispricing scandal is a crucial case study in the world of finance, emphasizing the need for ethical trading practices, robust risk management, and rigorous oversight. It serves as a stark reminder that the health of financial markets depends not only on sound financial instruments but also on the integrity and accountability of those who trade and manage them. The lessons from this scandal remain more relevant than ever.

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