1) Barings Bank collapsed in 1995 due to the actions of rogue trader Nicholas Leeson who took large speculative positions in Nikkei 225 futures from his position in Barings' Singapore office that ultimately caused losses of $1.4 billion. 2) Leeson was able to conceal his speculative trades and huge losses by using an error account and benefiting from lax oversight and controls from both Barings management and regulators. 3) The collapse of Barings Bank highlighted deficiencies in internal risk management systems and controls, and regulators have since worked to strengthen standards, though loopholes still remain that could allow future rogue traders to cause damage.

1. Series 1 – Corporate Governance, SIIB
Heten Koli Paresh Saxena Aditya Malpani

2. Barings Bank
Barings Bank (1762 to 1995) was the oldest merchant bank in London
until its collapse in 1995.
The demise of the bank was brought about as a result of the actions of a
derivative trader, Nicholas Leeson, stationed in Singapore.
This hit came principally from a hit on a long position in the Nikkei 225
futures of notional value around $7bn on the Osaka and Singapore
Exchange.

3. One may however ask:
 How is it possible that this one man
was able to cripple a financial giant?
 What was the role of senior management in this situation and
did they contribute to the demise?
 How effective were the internal control systems and was the
Singapore operations managed effectively?
 How certain deficiencies in internal controls and risk
management systems impacted the bank and ultimately led to
its collapse.

4. Nicholas Leeson – The Rogue Trader
 Worked for Morgan Stanley after graduating university.
 Hired as a relatively young clerk, he went to Barings' Singapore office
in 1992.
 He was put in charge of operations for Barings Futures Singapore
(BFS), with responsibilities both for trading and the accounting and
settlement activities.
 These functions were not segregated because Leeson & his staff were
expected to merely execute orders placed by other Barings Group
companies on behalf of their external clients.
 Later in 1992 many Japanese institutional investors set up their own
execution capability in Singapore. As a result, the external client
business of Baring Securities Japan (BSJ) became less viable.
 To compensate for the loss of business, BSJ commenced proprietary
trading on behalf of the Barings Group.
 Leeson alone made about 10 million Pounds that year, which was
about 10% of the bank profits of that year.

5. Leeson’s Doubling Strategy
 An attribute of doubling strategy is that the inevitable & devastating
loss is preceded by a period of high returns with low volatility.
 Leeson’s trading activities mainly involved three futures market:
• Futures on the Nikkei 225 stock index
• Futures on 10-year Japanese Government bonds
• Euroyen futures
 Leeson’s main assignment was to arbitrage between SIMEX and
Japanese exchanges in the futures contracts.
 Instead of arbitraging, he was speculating, financing SIMEX’s
margin requirements by selling options & borrowing huge amounts
of money from Baring’s head office in London.

6. The Collapse
 Nicholas bought a substantial number of contracts, 11,000 on the
20th of January 1995, just three days after the earthquake in Kobe.
 Probably, he thought that the market had overreacted and that thefall
of the Nikkei 225 from 20,000 to 18,950 was only temporary.
 But the Nikkei 225 dropped even further and by Monday 23rd
1995, the Nikkei 225 was around 17,950. At the end of February
1995, Nicholas Leeson had leveraged his position to $7bn, holding
about 61,000 contracts.
 The margin calls were enormous and Barings Tokyo London had to
transfer urgently a massive $835 m to Barings Singapore in January
and February to cover the margin calls on Simex. These calls made
finally Barings bankrupt as its reported capital was only of $635m.

7. Leeson: Then
 He was then extradited back to Singapore where he received a 6 and
a half year sentence to jail. Barings creditors went legal proceedings.
Many executives who were involved in the failure to control Leeson
either resigned or were sacked.
 In July 1999, Nicholas Leeson was released from jail on the ground of
good behavior.
 Ruined, abandoned by his wife and sick with a cancer (detected while
in prison), Nicholas Leeson became quite popular as the symbol of the
rogue trader

8. Specific lessons have been learnt
but loopholes appear all the time
 Raised the standards of internal controls and compliance.
 Banks are better capitalized which makes them less likely to
collapse in case of future rogue trader strikes.
 Front and back office operations are carried out independently
from each other.
Although lessons have been learnt there are loopholes. The
market is always changing in terms of products , complexity, and
vulnerability to fraud within and supervision from outside.

9. Could the regulators have done
more?
 Most of the banks are of the opinion that regulators should not me
blamed for the rouge trader incidents.
 The regulators cannot stop rogue traders from trying to fool banks
internal control.
 Others suggested of having minimum risk management standards for
every branch irrespective of its size and volume
None of the regulatory authorities in Singapore, Japan and UK
discovered the true use of error account.
 SIMEX assumed that Barings was hedging and not speculating
when it granted an exemption on the number of contracts that Barings
could hold.
 In addition, the speculative position of Barings was hidden due to
use of an omnibus account to clear trades. With an omnibus account,
the identity of the broker’s account is hidden from the exchange and
clearing house.