The collapse of Barings Bank was caused by colossal losses incurred by a single rogue trader.
Nick Leeson, the bank’s then 28-year-old head of derivatives in Singapore, gambled more than $1 billion in
Leeson’s assignment in Singapore was to execute “arbitrage” trade, generating small profits from buying and selling futures contracts on the Japanese Nikkei 225 in both the Osaka Securities Exchange and the Singapore International Monetary Exchange.
However, rather than initiating concurrent trades to capitalize on small differences in pricing between the two markets, he retained the contracts in the hope of creating much larger profits by betting on the rise of the underlying Nikkei index.
Through manipulating internal accounting systems, Leeson was able to misrepresent his losses and falsify trading records.
This enabled him to keep the bank’s London headquarters, and the financial markets, in the dark until a confession letter to Barings Chairman Peter Baring on February 23, 1995, at which point Leeson fled Singapore and
Leeson was eventually captured and sentenced to six and a half years in jail in Singapore after pleading guilty to two counts of “deceiving the bank’s auditors and of cheating the Singapore exchange.”
The fox guarding the hen house
ACA Compliance Chief Services Officer Carlo
Today, this would not be permitted either by regulators or the financial institutions themselves,
“Today, if you had a Nick Leeson on a trading desk, there would be trade surveillance systems with a whole bunch of triggers continuously looking at what kind of activity he is engaged in, and red flagging anything that seems potentially
The scale of harm caused by institutional failures such as Barings, Lehman Brothers and Bear Stearns has also driven a rethink of trader remuneration and bonuses,
“These big institutions won’t reward the trader until the trade has proven to be successful and effective and well risk managed, and if there is something that happens, they can go back and claw back the money. That changes the behavior of the trader.”
Reduced systemic risk
“Central clearing is the growing way to trade derivatives, and it means everything has to be reported, everything is going through a few large central players,” Veeral Manek, product manager at derivatives analytics platform OpenGamma, told CNBC.
“The way that the risk is managed means that it is very difficult to take huge leveraged exposure as you used to be able to.”
Complacency the greatest risk
“We will have another financial crisis, we will have other frauds and abuses. Where they come from may be new and different sources of risk than the last battle that we fought,” he predicted.
“Everything is so reliant on tech and the systems are so interconnected that if there is a hack and an attack, it can be exploited like never before.”