Barings Bank Report

What is the Role of Investment Bank in Derivatives Trading?

Investment bank is a financial institution that acts as an agent for individual investor

or institutional investor in providing services like information facilitate transaction

and operates investment activities for clients. Unlike commercial bank, investment

does not provide deposit service.

Investment bank basically involve in trading securities for cash or security, facilitating

transaction, market making, and promoting securities (underlying or research) for the

“sell side”. It also deal with mutual fund, hedge fund, pension fund and investing

public who consumed the securities and services offered by the “sell-side” in order to

maximize their return on investment constitutes the “buyer side”.

In the derivative trading, investment bank is holding a significant role in helping

individual or institution investors. They usually act as agent for their client to involve

in derivative trading in the exchanges. They buy and sell the derivative contracts on

behalf of clients to fulfill the clients’ objective either earning arbitrage profit,

speculating or hedging. Besides that, investment banks are also helping their clients in

creating derivative contracts to raise fund or hedging either traded at OTC market or

ETD market. In order to do so, investment banks have developed their research team

to analyze the derivative market. In order word, investment banks also provide

advisory services for their derivative trader. The information provided is necessary for

traders to analyze the derivative market and making right decision. This is related

with the front office’s responsibilities.

Besides that, investment banks also performing risk management services for their

clients. They are responsible to make sure the credit risk and operational risk are

reasonable and acceptable for every trader either buyer or seller. Sometime, they also

act as a clearing house to eliminate the counter-party risk in the OTC market on

behalf of their client. Moreover, investment banks will help their clients in

compliance with the exchanges’ rule and regulation. This is their responsibilities to

make sure every transaction is following the regulation to protect themselves and their

clients. These types of services are usually performed by middle office unit.

Furthermore, investment banks also accountable for every single transaction. They

usually perform trade confirmation to make sure the accuracy of each transaction and

reduce the default risk either caused by their workers or trader himself. Investment

also provide software and technology platform to assist the front office in trading and

providing information to the clients. For example, investment bank will link their

website with the exchanges’ database to show the performance of certain derivative

contracts for their clients. This increase the efficiency and effectiveness of the whole

investment banks’ operation. Investment bank is an important party in the derivative

trading.

What is Derivatives?

Definition of Derivatives

Derivative is one of the financial instruments which are actively traded in the

derivative market around the world. This financial instrument is an agreement

between two different parties which the value of the instrument is determined by

contingent future outcome of particular underlying factors. Those factors can be

changed due to commodities’ price, share price, index, interest rate, value of currency,

foreign exchange rate, and credits and so on. There are several types of derivatives,

commonly such as futures, forwards, options, and swaps. However, since the

derivative can be positioned on any kind of securities, thus, the scope of the type of

derivative is boundless. When study a derivative instrument, basically we have to look

for the relationship between the underlying and the derivative, type of underlying,

which market being involved, and the purpose of investing in such market. The

following table show that the increasing of size of derivative market since 1990 to

1996.

Types of Derivatives Market

The derivative market is the financial trading market for derivatives. In broad terms,

there are two different derivative markets which are Over-The-Counter derivative

market (OTC) and Exchange-Traded derivative market (ETD).

Over-The-Counter derivative market (OTC) is designed to serve contracts traded

directly between the seller and buyer which privately negotiated without going

through any intermediary or exchange body. OTC is the largest market for derivative

trading compare to the ETD market. The traded derivatives are normally tailor-made

derivatives which fulfill the need of both side traders because it is privately negotiated

by both parties and without going through any intermediary. This is the benefit of

trading in the OTC market. However, due to this freedom in trading, OTC derivative

market is also the largely unregulated market with respect to the disclosure of

information between both parties. Reporting of OTC amount is difficult to be

noticeable since the trades are taking place privately, without activity being

observable on any exchange. Therefore, OTC derivatives are subject to higher

counter-party risk compare to the ETD derivatives. Examples of OTC derivatives are

swaps, forward rate agreements, credit derivatives and so on.

Exchange-Traded derivative market (ETD) is created to serve derivatives that are

standardized contracts through specialized derivative exchanges. A derivative

exchange acts as an intermediary to all related derivative trading. They will incur an

initial margin for the traded derivatives from both parties as a guarantee. Since the

trading is under the control of the derivative exchanges, the counter-party risk is much

lower compare to the OTC derivative market. The derivative exchange provides

investor access to information of the trading and guarantees the performance of the

contract. The world’s largest derivative exchanges are the Chicago Board of Trade,

Chicago Mercantile Exchange, Korea Exchange and so on. Examples of ETD

derivatives are options and futures contracts.

Types of Common Derivative Contracts

As mention before in the definition of derivative, there are three common classers of

derivative which are future/forward, option, and swaps.

In derivative, futures contract is a standardized contract between both buyer and seller

on a specified asset with standardized quantity and quality at a particular future date

with a price agreed today (future price). Futures contracts are normally traded through

future exchange. A futures contract is different from forward contract because it is a

standardized contract written by clearing house while forward contract is a non-

standardized written by the parties themselves. The responsibilities of clearing house

are to minimize the counter-party risk and monitor the exchange of future contract.

They act as the buyer for the each seller and the seller for the each buyer. Thus,

function of clearing house will eliminate the need of performing due diligence by both

parties. Besides that, in order to reduce the credit risk, traders are also been required

to post a margin or a performance bond which normally around 5% to 15% of the

contract’s value. The futures contract can be settle with two ways. First is physical

delivery. The seller will deliver the underlying asset with the specified quantity and

quality to the exchange and then, to the buyer of the contract. It usually involves

commodities and bond delivery. Second is cash settlement. A cash payment is made

based on the underlying reference rate such as index and interest rate. Both parties

settle the contract by receiving/paying the gain/loss related to the futures contract in

cash when it is expires.

An option is different from futures. Option giving the owner the right but not the

obligation to buy or sell a particular asset. An option to buy something is called as

call option while option to sell something is called as put option. An option usually

sold by the creator to another buyer. It can be standardized form of contract traded in

exchanges like commodities option or contract customized to the desires of the buyer

traded in OTC market. The option contract usually contain certain specification such

as quantity and class of the underlying asset, strike price, expiration date, settlement

terms and so on. Besides that, option contract can also be categorized into two

different types due to the exercising period of the option. First is European option

which the owner has right to exercise the option only at maturity date. Second is

American option which owner has right to exercise the option at any time up to the

maturity date. If the owner exercises the option, counter-party has the obligation to

carry out the transaction. The following will be the basic trades of option. Premium is

the option price the pay by the trader to obtain the option.

Long call option will be traded when

the trader believes that price of the

underlying asset will increase. Trader

will only exercise the option to buy

the underlying asset if the price of the

underlying asset higher than the strike price. Profit will be earned if exercise price

greater than premium plus strike price.

Long put will be traded when trader

believes that the underlying asset’s price

will decrease. Trader will only buy the

underlying asset if the price of

underlying asset is lower than the strike

price. Profit will be earned if exercise

price lower than the strike price plus premium.

Short call option will be traded when the

trader believes that the price of

underlying price will decrease. The trader

selling the call have obligation to sell the

underlying asset to the option buyer. If

the price of underlying asset is lowers

than the strike price, the trader will earn a profit in the amount of premium.

Short put option will be traded when trader

believe that the price of underlying asset

will increase. The trader selling the option

will has obligation to buy the underlying

asset from the owner of option. If price of

the underlying asset is higher than strike price, the trader will earn a profit in the

amount of premium.

Swaps is an financial tool which counter-parties exchange certain benefits of one

party’s financial instrument for those other party’s financial instrument. The benefit

will be defined by both parties so that it will fulfill their needs. Swaps contract is due

with the exchange of cash flow on or before a specified future date based on the

underlying value of assets. For instance, two counterparties agree to exchange one

stream of cash flow against another stream. This contract can be used to hedge certain

risks or to speculate on changes in the expected direction of underlying prices.

Basically, swaps contracts are traded at OTC market, thus, it can be tailor-made for

the counterparties.

Purposes of Investing In Derivative Market

Since the derivative market is growth rapidly, it will be necessary for us to understand

the reasons of invest in the derivative market. Basically, there are four reasons of

investing in the derivative market as follow:

To speculate and make profit due to the changes of the value of the underlying

assets.

To hedge or mitigate risk incurred in the underlying asset by entering into a

derivative contract which the value of the derivative contract is opposite

direction compare to the underlying position as whole or part of it.

To exposure to underlying asset which it is not possible to trade in the

underlying asset market.

To create optionability where the value of the derivative is linked to a specific

condition or event.

Hedging

In finance, hedging is a strategic to mitigate or eliminate risk exposure to the price

fluctuation of the assets or the availability of the assets. In this respect, derivative

market can be considers as a important financial instrument in hedging. Normally,

hedging strategic will trade with the ETD market because of the involvement of third

party, named clearing house which helping in mitigate the counter-party risk and

default risk.

To reduce the risk of price fluctuation, derivatives such as future or forward contract

is work with it. For example, an individual investor or institution who involve in stock

trading can exercise hedging strategic by buy stock at the underlying market and sell

the futures contract which the value of the derivative is linked to the performance of

same stock but in the opposite direction. The risk of price fluctuation is eliminated in

such situation because when stock’s price fall in the underlying market, the value of

the futures contract will increase in the same manner and vice versa. This hedging

strategic is useful especially when the volatility of underlying market is high.

Besides that, risk of availability of asset can also be mitigated by using derivatives.

For instance, a logistic company can create a futures contract or option contract with

the fuel producer like Shell to secure the availability of fuel in the future. The

derivatives will reduce future risk for both parties. Logistic company will sure to

obtaining the fuel and fuel producer will reduce price fluctuation risk.

Speculative and Arbitrage

Besides hedge against risk, derivatives contract can also be used to acquire risk in

order to earn profit. Some institution or individual enter into the derivative contract to

speculate on the value of underlying assets. Those speculators will forecast the future

price movement of certain underlying asset and create derivative contract to gain

profit from it. Speculator will want to buy as asset in the future at a low price

according to a derivative contract when future market price is high, or to sell an asset

in the future at a high price according to a derivative contract when the future market

price is low.

Besides that, some individual or institution is also looking for arbitrage opportunities

in the derivative market. Arbitrage profit is derived from the changes of price of

underlying asset between the time of sell and buy. They will gain the arbitrage profit

if the purchase price is lower than the future exercise price of the particular

underlying assets.

Not matter speculative or arbitrage, it normally involves high risk. Huge loss maybe

incur to the individual or institution. Since the speculative and arbitrage strategic is

wholly depend on their forecasting ability. Such uncertainty of the underlying asset

will increase the probability of loss. The Barings Bank case is the best example in

explaining this condition. The fall of Baring Bank was due to the wrong estimation of

Nikkel 225’s performance by Nick leesons and the volatility of the changes of Nikkel

225 in the market. So, massive loss may suffered by speculator and arbitrager.

Introduction of Barings Bank and Nick Leeson

Barings Bank was founded in London in 1763 which rose to become the Britain’s

oldest Merchant Bank as well as becoming the leading Merchant Bank. As such, it

provided traditional banking services to the public while performing investment

activities in stocks, bonds, commodities and real estate. The bank focused in

investment sector activities which could lead to success in trading on the future. By

1989, Barings had established trading operations at most of the world’s exchanges

operating began in British Commonwealth countries and former British colonies. By

being creative and flexible in crafting the financial solutions for organizations,

Barings Bank enjoying grew up steadily over time across the globe. In February 1995,

the bank was discovered in involving a huge fraud scheme, perpetrated by one of its

traders in Singapore-Nick Leeson. He had wiped out the bank’s capital and destroyed

the 220 year old institution.

Previously, Nick Leeson had graduated from college and spent two years at Morgan

Stanley as a settlement clerk and in duties on clearing the huge futures and options

deals. In 1989, this young commodities trader joined Baring Securities Ltd (BSL) and

working primarily in the settlements department. In the mean time, he had applied to

become a dealer with the Securities and Futures Authority (SFA) in London early

1992. After the first quarter of 1992, Leeson was posted to Baring Futures Singapore

Ltd (BFS) to perform the settlement operations as well as the floor manager at the

Singapore International Monetary Exchange (SIMEX). This is the beginning

opportunity for Nick Leeson to bring down the Barings Bank due to the inconsistency

of the risk management fundamental. Leeson was selected to open, run and manage

the new operation in Singapore, managing all aspects of trading on SIMEX and he

had been with the Barings Bank approximately three years and possessed a total of

five years experience in banking.

What was the strategy being implemented by Nick Leeson which caused Barings

Bank to face huge losses?

Around 1990’s, derivative market is rapid growth financial instrument around the

American and European markets even the Asia-Pacific region. The Barings Bank

board was decided to actively participate in the Asia-Pacific’s derivative market in

order to become one of the first active bankers in the derivative market. That is the

reason for Barings Bank employed and sent Nick Leeson, a young trader as general

manager of the Barings Bank Futures subsidiary in Singapore to manage the

derivative operation.

Nick Leeson was given a lot of freedom by Barings Bank in the derivative trading

since he was the one who deem to know very well of the derivative market operation.

He was appointed to in charge of both client and proprietary account on behalf of

Barings Bank trading in Asia-Pacific region. He was traded in several main financial

futures and option exchanges as following:

Nikkei 225 contract traded on SIMEX in Singapore and OSE (Osaka Stock

Exchange) in Japan

10 –year JGB (Japanese government bonds) contract dealt in SIMEX and

OSE.

3-month Euroyen contract dealt in SIMEX and TIFFE (Tokyo Financial

Futures Exchange) in the Japan.

In the early state, Barings Bank‘s management was planned to operate an inter-

exchange arbitrate strategy. This strategy required Nick Leeson to buy and sell Nikkei

225 futures contracts simultaneously on both SIMEX and OSE market in order to gain

the arbitrate profit from the different in price of the Nikkei 225 futures contracts.

( Buying at lower price and selling at higher price). This strategy would consider as a

risk-free investment and provide good opportunity for profit in the high volatile

market. However, due to the contracts’ price is slightly different, the profit earn is

small. Because of this, Nick Leeson was decided to change the strategy.

The strategy implemented by Nick Leeson named as “straddle” with the objective of

making a profit by short put and call options on the same underlying assets – Nikkei

225 Index.

This graph explains how the “straddle” strategy works. A short call option will gain

profit only when the price of underlying asset is lower than the strike price. The profit

earned is the premium from selling the option. For a short of put option, profit will be

gained when the price of the underlying asset is higher than the strike price so that the

owner will not exercise the option. The profit amount is same with the premium from

selling the option. With the combination of short call and put option, Nick Leeson will

be able to develop the above graph. From the graph, we can see that the profit portion

is small and only happen if the price of underlying asset is close to the strike price

(maximum profit when exercise price same with strike price). When the price of

underlying asset is higher or lower than the break-even point, Nick Leeson will suffer

huge loss as shown by the graph. The loss volume will increase with the raising of

volatility of the price of underlying asset. In short, we understand that “straddle”

strategy will only provide positive earning when the market is stable.

Is the Nikkei 225 Index is a stable financial instrument?

Nikkei 225 is a stock market index for the Tokyo Stock Exchange (TSE). It represents

a price-weighted average of the Japanese stock market. In year 1986, Nikkei 225

futures contracts had been created and introduced at SIMEX, OSE and Chicago

Mercantile Exchange (CME). It is now an internationally recognized futures index.

The graph is showing the performance of Nikkei 225 Index during1970 until 2010. It

clearly shows that the Nikkei 225 Index was fluctuated throughout the whole year.

This caused the loss suffered by Nick Leeson keep on increasing. The situation went

worse when the Kobe earthquake happened in Japan during year 1995. The Nikkei

225 Index dropped 1000 points approximately which deteriorate the Barings Bank’s

loss. The following graph is showing that the loss of Barings’ futures position and the

drop of Nikkei 225 Index during January and February of year 1995.

On 27 January 1995, the account “88888” showed a long position of 27,158 March

1995 contracts. In order to cover the loss, Nick Leeson decided to double up the long

position to 55,206 March 1995 and 5,640 June 1995 contracts. This decision was

based on the forecasting make by Nick Leeson who believes that the Japanese market

to recover very soon and the Nikkei 225 Index increase and become more stable. In

fact, Nick Lesson estimation was wrong. The Japanese market was not recovered in

the short time and cause the loss suffered by Nick Leeson keep on increasing.

Because of the terrible forecasting and “straddle” strategy, Nick Leeson sent Barings

Bank to the collapse due to high loss suffered. It is also Nick Leeson’s crime which he

changed the investment strategy from inter-exchange arbitrage to “straddle” strategy

and cover the loss using other accounts.

What are the Reasons that led to the Fall of Barings Bank?

Lack of internal checks and balances

In July 1994 until August 1994, the internal auditor of Barings Bank, James Baker has

spent two weeks in Singapore to investigate the suspicious profits being made by

Nick Leeson. James Baker identified the weaknesses in the internal controls in

Barings Bank and recommended that the General Manager should not responsible for

the back office in order to avoid the conflict of interest deficiency by holding two

position at the same time in the organization. In response to the suggestion given by

Baker, Barings Bank had taken their action by simply appointed the part time separate

financial manager in Hong Kong to watch over the back office activities. This action

taken by management was insufficient in monitoring Leeson’s activities, indeed.

Leeson’s activities could not be effectively supervised due to the incompetency of

management.

No Segregation of duties

Barings Future Singapore (BFS) was facing difficulties when Leeson was permitted to

remain the responsible for both front office and back office. Although the

management of Barings did not noticed about the existence of the unauthorized

activities being made by Nick Leeson, but, the internal auditor did suggested the

recommendations to improve the separation of roles in the Barings Bank. In fact,

these recommendations were never been implemented.

The internal report was introduced widely among management in London and was

generally acknowledged as crucial. Copies of internal audit report were distributed to

i. Norris, Chief Executive Office of Barings Investment Bank (BIB)

ii. Broadhurst, Group Finance Director of Barings Investment Bank (BIB)

iii. Hopkins, Director of Group Treasury and Risk of Barings Investment Bank

(BIB)

iv. Barnett, Chief Operating Officer of Barings Investment Bank (BIB)

v. Ron Baker, Head of Financial Product Group (FPG)

As we can see above, the top level management had been acknowledged about the

matter happened in Barings Bank. Yet, by February 1995, nothing had been taken in

order to implement the recommendations of the reports as to segregate the duties of

Nick Leeson. Most of those who had received the internal audit report claimed that, it

is the responsibility of others (mainly in Singapore) to implement the

recommendations. The discrepancies happened between the management allowed

Nick Leeson to freely perform his unauthorized trading during his period in BFS.

At Singapore itself, Simon Jones, the Director of Barings Future Singapore (BFS)

(who had also responsibility for Barings’ operations in Singapore) seems like have not

taken any significant steps to give effect to the recommended segregate of duties

toward the Nick Leeson position. He should immediately restrained Leeson to

perform certain functions in settlement and recording processes after being

acknowledged by the internal audit report.

Unauthorized trading activities

The unauthorized trading was concealed by differences of devices including the error

account “88888”, the submission of falsified reports to London, the misrepresentation

of the profitability of Barings Future Singapore‘s (BFS) trading, a number of false

trading transaction in cross trade and false accounting entries. All this activities was

done by a single person-Nick Leeson who was claimed as “rogue trader”.

The creation of “88888” account

Even the segregation of duties was suggested by the internal auditor, but Barings

Bank diluted the concentration toward the Nick Leeson’s power. Nick Leeson was

being able to possess his authority to make decision in managing cheque, signing

authority, authority to sign off on trading reconciliations and responsible for

inspection in bank reconciliations. According to Nick Leeson, he was asked by the

London office of Barings to create another error account in order to handle only trivial

items arising in Singapore. Since that, the error account namely “88888” was created

by Leeson and he used this opportunity to manipulate any premiums or losses that he

made in the derivative’s transactions. Because of the lack of internal checks and

balances and the birth of the error account (“88888”), Nick Leeson was able to make

his “gambles” activities in the derivatives market and cover for his shortfalls by

reporting losses as gains to Barings in London. Leeson had took his tricky action in

altering the error account in order to prevent the London office from receiving the

standard daily reports on trading, price and status.

By using the hidden “five eight account”, Leeson began to actively trade in futures

and options on SIMEX. The money entrusted to the bank by subsidiaries was being

used by Leeson within his own “88888”account. He made a false statement in trading

records in the bank’s computer systems and used money intended for margin

payments on other trading.

Leeson's Positions as at End February 1995.

Number of contracts1

nominal value in US$

amounts

Actual position in terms of open interest of

relevant contract2

Reported3 Actual4

Futures

Nikkei 22530112

$2809 million

long 61039

$7000

million

49% of March 1995 contract and 24% of

June 1995 contract.

JGB15940

$8980 million

short 28034

$19650

million

85% of March 1995 contract and 88% of

June 1995 contract.

Euroyen601

$26.5 million

short 6845

$350

million

5% of June 1995 contract, 1% of September

1995 contract and 1% of December 1995

contract.

Options

Nikkei 225 Nil 37925 calls

$3580

million

32967 puts

$3100

million

1. Expressed in terms of SIMEX contract sizes which are half the size of those of the

OSE and the TSE. For Euro yen, SIMEX and TIFFE contracts are of similar size.

2. Open interest figures for each contract month of each listed contract. For the Nikkei

225, JGB and Euroyen contracts, the contract months are March, June, September and

December.

3. Leeson's reported futures positions were supposedly matched because they were part

of Barings' switching activity, i.e. the number of contracts on either the Osaka Stock

Exchange, or the Singapore International Monetary Exchange or the Tokyo Stock

Exchange.

4. The actual positions refer to those unauthorized trades held in error account '88888'.

Source: The Report of the Board of Banking Supervision Inquiry into the

Circumstances of the Collapse of Barings, Ordered by the House of Commons, Her

Majesty's Stationery Office, 1995

The Cross Trade

A cross trade is a transition executed on the floor of an exchange by just one Member

who is both buyer and seller. He is allowed to cross the transaction (execute the deal)

only if he can matching buy and sell orders from two different customer’s accounts

for the same contract and at the same price. However, he can only apply this method

after he had declared the bid and offer price in the pit (trading) and no other Members

has taken it up. Under SIMEX rules, the Member must declare the prices for three

times and the cross trade must be executed at market price. Leeson entered into a

significant quantity of cross transactions between account “88888” and account

“92000” (Baring Securities Japan – Nikkei and JGB Arbitrage, account “98007”

(Barings London-JGB Arbitrage) and account “98008” (Barings London-Euroyen

Arbitrage).

After executing these cross trades, Leeson would instruct the settlements staff to split

down the total number of contracts into several different trades and changing the trade

price in order to affect the profits to be credited to “switching” accounts (“92000”,

“98007”, and “98008”) and the losses to be charged into account “88888”. Thus, these

transactions and manipulations activities taken by Leeson caused the cross trade on

the Exchange appeared on a genuine and within the rules of the Exchange.

No. of

contracts in

account

“88888” 2

Price

per

SIMEX

Average

Price per

CONTACT

Value

per

SIMEX

JPY

millions

Value per

CONTACT

JPY

millions

Profit/(Loss)

to “92000”

JPY millions

Buy Sell

20

January6984 18950 19019 66173 66413 240

23

January3000 17810 18815 26715 28223 1508

23

January8082 17810 18147 (71970) (73332) (1362)

25

January10047 18220 18318 91528 92020 492

26

January16276 18210 18378 148193 149560 1367

Total 2245

1. This table is related to the Report of the Board of Banking Supervision Inquiry

into the Circumstances of the Collapse of Barings, Ordered by the House of

Common, Her Majesty's Stationery Office, 1995.

2. This column represents the size of Nikkei 225 cross-trades traded on the floor

of SIMEX for the dates shown, with the other side being in account “92000”.

Table 10.3 below is an example of how Leeson manipulated his books to show a

profit on Barings's switching activity.

We notice that lack of internal checks and balance in an organization could lead to

disaster just like Barings Bank did. Leeson could simply cover his action within his

capabilities and authority through using loophole in the Barings Bank’s internal

controls.

Lack of understanding in the derivative markets

The Bank of England summarized that Barings Bank’s senior management team did

not understand the risks incur represented by the instruments that Lesson could

potentially trade. Leeson engaged in the certain options trading strategies that created

downside risk (potential loss if price decline) for the company under some market

conditions even he was not authorized to do so. Leeson sold options and using the

“straddles” strategy, the former, in order to cover up his activities each month and he

try to manage his losses(not manage the loss). Straddles are a potentially highly

profitable trading strategy which involving both put and call options and it is suitable

for the person who expects a neutral and low volatility market in the underlying

securities.

If the Barings Bank’s auditors and top management had understood the derivative

trading business, they will had realized that it is not possible for Leeson to be making

the profits as reported without taking the risk into considerations. Furthermore, they

might have a lot of questions to ask where and how the money was coming from to

cover the losses(no include cover loss). After the several months, Leeson’s activities

was only started to be tracked and revealed after the Kobe earthquake in Japan

happened on January 17, 1995. Leeson initially took his action to transact the put and

call options within a massive volume in hoping that the Nikkei market will goes up

quickly to obtain the profit and cover his losses that he has made. But, in contrast, the

Japan’s market keep on dropping to loss and Leeson could not afford the pressure for

being keep on conceal the loss. At the end, the entire activities that Leeson had made

were completely pulled down the Barings Bank. At that point of time, every party in

the management realized that everything was too late to be recovered

Poor supervision of employees and lack of senior management involvement

There was an oversight on Leeson’s activities and no individual was directed to

monitor his trading strategies although Leeson had never held a trading license prior

to his arrival in Singapore. Even each department was being fragmented, no one or no

department had a clear overview of what was going into the bank? Nick Leesson

personally claimed a severall statement that:

i. Anybody who was supposed to have some control over his activities

was going elsewhere.

ii. The people who were looking after the traders were based in London.

iii. The people in charge of the compliance function were in London.

iv. The risk management areas were in Tokyo

v. He was both the senior trader and settlements person in Singapore

This clearly showed a very serious and obvious implication to the Baring Bank itself.

Besides, Nick Leeson was exposed to the fraud activities. Although the above matter

has been pointed out regularly in audits (internal and external), but no action had to be

taken to overcome the weaknesses.

1.0 Simon Jones - The Finance Director of Barings Future Singapore

(BFS)

Going into more details, Leeson’s back office functions were never effectively

monitored. The staffs in the back office in Singapore were relatively junior and they

simply obey Leeson’s instructions. The Finance Director of BFS, Simon Jones, was

concerning himself primarily with the affairs of Barings Securities Singapore (BSS)

and devoted little attention to Barings Future Singapore (BFS). While, no appropriate

degree of supervision and internal controls was being implemented to overcome these

weaknesses. Thus, BFS was operated almost entirely by Nick Leeson alone. This lack

of supervision was reflected in the failure on the part where Jones was dealing with

satisfactorily with the letters of SIMEX to BFS on 11 January 1995 and 27 January

1995. Both of these letters was very crucial to reveal the Leeson’s activities regarding

on poor management.

1.1 The letter on 11 January, 1995

SIMEX’s senior vice president for audit and compliance, Yu Chuan Soo, complained

that,

i. A margin shortfall about US$116 million in account “88888” had been

incurred and this had showed the SIMEX rule 882 was violated (by

previously financing the margin requirements of this account which

was appeared in SIMEX’s system as a customer account).

ii. Initial margin requirement of account “88888” was in excess of

US$342 million.

Barings Future Singapore (BFS) was being asked to provide a written explanation of

the margin difference on account “88888” and also explain about its inability to

account for the problem in the absence of Leeson. In fact, no warning or caution went

into the BFS and no one investigated who was the real customer. Furthermore,

nobody investigated why Leeson was having difficulties in meeting margin payment,

and why he had such a huge position for margin requirement in account “88888”.

Unfortunately, Simon Jones, (who was legitimately responsible to inspect the

condition happened) was not sent a copy of the letter above to the Operational Heads

in London and he also did not asked Leeson to give detail explanations about the

above matters. Indeed, Jones dealt with the matter by just allowing Leeson to draft the

response to SIMEX and this affected the London received the wrong (or edited)

information.

1.2 The letter on 27 January, 1995

Second, the letter of 27 January 1995 related to the assurance of BFS’s ability to fund

its margin calls. Although a copy of this letter was sent to Barings in London, but

Jones did not investigate why such letter had been sent.

This second letter was related to the incident which is come to the attention of

London. But, it again, was dealt with unsatisfactorily by the management. At the

initial period of February 1995, Coopers & Lybrand brought to the attention of

London and Simon Jones the fact that, US$83million apparently due from Spear,

Leeds & Kellogg (a US investment group) that had not been received. Again, no one

was sure on how this multi-million dollar receivable arose. There have two version

explaining the above matter. One is, in BFS (through Leeson), had traded (or broken)

an over-the-counter deal between Spear, Leeds & Kellogg and BNP, Tokyo. The

transaction involved 200 of 50,000 call options and resulting in a premium of

US$83million. The second version is, an ‘operational error’ had occurred (a payment

had been made to a wrong third-party in December 1994)

No matter what version it was, these had serious control implications from Barings

Bank. If Leeson had sold (or broken) the deal in an OTC option, then he obviously

had engaged in an unauthorized activity. Yet, he should be warned for doing the

activities. In fact, there is no any record of Barings Bank’s management to take any

actions or steps to ensure that the matter above did not happen again. If the Spear,

Leeds & Kellogg receivable was facing an operational error, Barings Bank had to

strengthen its back-office procedures in order to avoid the same mistake occur again

2.0 Fernando Gueler - The Head of Financial Product Group (FPG) in

Barings Securities Japan (BSJ)

The lack of supervision of BFS was extended elsewhere. Fernando Gueler, the Head

of Financial Product Group (FPG) in Barings Securities Japan (BSJ) was based in

Tokyo and experienced in the operation of Japanese markets, and he also responsible

in analyzing the risks on Leeson’s intra-day trading activities from 1992 until the last

quarter of 1994. The matter is, he did not have a clear understanding of his duties in

supervision over BFS’s trading activities and he argued that he was responsible for

supervising Leeson’s switching activities. He should knowingly that BFS’s trading

activities were not properly supervised and he should not have allowed this lack of

proper supervision to continue.

Ethical point of views

Person who was attracted to unethical means for self interest which refer to the

advancing their careers and strengthen their financial position was often driven by the

intention to defense their own poor self image. The person will act themselves

favorably while, try to avoid from being detected. From the case of Barings Bank,

Nick Leeson who was above his capability in trading and managing at BFS

intentionally created a dummy account in order to absorb his substantial trading losses

(according from Leeson, 1996) for two years. Finally, this unethical behavior

performed by Leeson collectively lead to the collapse of Barings Bank on 1995. The

case of Barings Bank leads to the awareness of ethical behavior in banking

organization as well as corporate world in order to prevent and avoid the same

situation to be happened again.

It is therefore easy to conclude that:

• The losses were incurred by reason of unauthorised and concealed trading activities;

• The true position was not noticed earlier by reason of a serious failure of controls

and managerial confusion within Barings; and that

• The true position had not been detected prior to the collapse by the external auditors,

supervisors, or regulators of Barings.

What are the roles of internal audit, external audit, corporate governance and

risk management in mitigating risk arise since the collapse of Barings Bank?

In the Baring case, lack of proper supervision from the top management and

deficiencies in internal control and risk management of the organization had led to the

arisen of operational risk, which led to the collapse of financial giant, Barings. The

Basel Committee defines operational risk as “the risk of loss resulting from

inadequate or failed internal processes, people and systems or from external events.”

Risk Management

Risk management is crucial in a company where it can identify the risk areas of an

organization. Once the risks have been identified, management would take further

actions to reduce the risks to a tolerable level. Obviously, there was deficiency in

Barings Bank’s risk management. Basically, the risk in Barings was arising from the

incident as follow:-

(i) No proper supervision from the management over the activities done by

Nick Leeson

(ii) Senior executives had no understanding about the business of derivative

trading

(iii) There was no segregation of duties

Those incidents as above had created operational risk to Barings. In order to mitigate

the operational risk, the management has to play its role before pointing fingers to

others when the problems happen. The management has to implement enterprise risk

management where it could identify potential events that may affect the bank and

manage risks to be within its risk appetite. The bank should always establish the risk

culture and have a proper policy that help to ensure the risk response is carried out,

considers risk strategy in the setting of objectives, determine the risk appetite;

differentiate the events whether they are an opportunity or threat, assess the risk with

qualitative and quantitative risk assessment methodologies and response to risk with

proper actions. If these would have implemented by the Barings Bank’s management,

they could have identify the risk and take appropriate action when they were informed

by the internal auditors that there was a problem in the control system in Barings

Future Singapore. Hence, Barings Bank might still exist now.

Without proper supervision from the management

Corporate governance defined by Gabrielle O’ Donovan as “an internal system

encompassing policies, processes and people, which serves the needs of shareholders

and other stakeholders, by directing and controlling management activities with good

business savvy, objectivity, accountability and integrity. ” In Barings case, the board

and top management were considered as failed to implement their fiduciary duties for

the benefits of shareholders and company. It is because the top management was said

to have little oversight over the activities done by Nick Leeson even though he was

just got his trading license during that time. Hence, it provided amble of opportunities

to Nick Leeson to perform unauthorized trading and hide losses from the sight of

management. Due to huge losses made by Nick Leeson, Barings Bank collapsed

eventually in 1995. After this incident, the management of each organization should

take this as a lesson by having proper supervision and monitoring over their

subordinates’ activities. It is crucial to ensure that activities done by subordinates or

employees are mainly for the benefits of the organization.

Lack of understanding about derivative trading

After the incident happened, the top management claimed that they did not understand

the business of derivative and how the transactions were operated. Due to this

problem, they can only provide guidance to Nick Leeson based on quantitative

elements such as profit figure rather than strategy in nature. Senior executive would

rather to encourage Nick Leeson to obtain higher profit rather than investigate how

Nick Leeson would be able to get such a high profit from trading in arbitrage between

future contracts, which were low risk in nature. Based on the risk management

principles, low risk would have low return and vice versa. Arbitrage profit is usually

much lower than the speculation profit. The management of Barings seems like ignore

about the basic principles and that is why they failed to detect the fraud done by Nick

Leeson in the derivative trading. Due to such problem, the top management should be

sent to training or attend courses to enhance their knowledge about derivative market

and to be able to become the all rounder in the banking industry deal with derivative

trading. This could increase the competencies of the top management to supervised

their subordinates and understand what they are doing in the operations. By attending

the courses, the top management would have better understanding about the nature of

derivative business which in turn could provide proper recommendations and

guidance to subordinates. Thus, it helps to mitigate the operational risk.

Without segregation of duties

Nick Leeson was given two responsibilities, which were appointed as floor manager

of Barings Future Singapore to deal in Singapore Money Exchange (SIMEX) and also

in charge for the operation at back office to record the daily trading transactions.

Normally, Nick Leeson would stay at SIMEX until trading closed at 2PM. After that,

he would back to the office and record all the trading transactions for that particular

day. Thus, he was the only one who knew about whether the recorded trading

transactions were matched to the actual trading transactions. Besides, he was also the

one who had given authority in cheque signing and sign off on trading reconciliation

as well as responsible for vetting bank reconciliations. Obviously, there was conflict

of interest between the two responsibilities, which would give rose to the operating

risk. These two jobs supposed to be done by different people in order to mitigate or

reduce the risks of fraudulent activities happen. In order to mitigate risk, organization

especially those involve in financial industry should review organization’s internal

control. Top management and internal auditors in an organization play an important

role to ensure that segregation of duties is in place. No single employee can handle

more than one crucial position in an organization especially those who dealing with

financial and accounting information. This could help to safeguard company asset and

produce more accurate information through reduce or mitigate the fraudulent risk.

Indeed, management should understand that they have fiduciary duties towards the

benefits for shareholders and company. Therefore, it is crucial for the management to

know about the risks that might be faced in an organization. In short, in order to

mitigate the risks, management cannot run away from giving proper supervision to the

subordinates, understand the business nature and tighten up the internal control in an

organization. Barings Bank’s case should be a great lesson to other organization

especially financial industry entity.

Negligence of external auditor

The fall of Barings Bank was partly due to the negligence of the external auditor in

performing their professional skills in auditing the Baring Future Singapore as well as

the consolidated financial report in London Barings Bank. The reason could be the

auditors themselves have lack of knowledge in derivatives trading and hence were

incompetent to audit the financial performance of Barings Bank.

To improve or avoid the similar case from happening, the audit firms should always

send their auditors to attend the professional courses to enhance their knowledge in

order to increase their competencies in auditing companies that fall in different

industries. Besides, the audit firms should have specialized skills auditors so they

could be the expert in the particular industry to perform and oversee the audit work

with due diligence care. By improving the auditors’ competencies, they will reduce

the risk of negligent in performing audit work and finally may have avoided the fraud

from happening.

Corporate Governance

In recent development of the corporate organizations, corporate governance is one

terminology that has continued to reflect in the internet, media, newspaper etc. The

weak corporate management was exhibited by numerous well known organizations

and has drawn so much attention. The issue of corporate governance was considered a

global matter and the effect of inefficient corporate governance could lead to disaster

since it affects the socio-economic and political lives. Basically, corporate governance

could be defined as a set of processes, customs, policies, laws and institutions which

can affect the direction of a corporation (way of being administered and being

controlled). Corporate governance also covers the relationships among and between

many stakeholders involved in operating a corporate organization and the

establishment of goal.

The failures of Barings Bank have created awareness and sensitivity among people

related to the issue of corporate misdeeds. In fact, the collapse of Barings Bank

(Britain’s oldest merchant, Queen’s bank and it had financed the Napoleonic Wars,

the Louisiana Purchase and the Erie Canal) was caused by the actions of a rogue

trader at a small office in Singapore, Nick Leeson. Due to the lack of segregation of

duties only, Nick Leeson could exploit the Barings Banks derivatives activities and

totally wiped out the Barings Bank’s capital (around $1.4 billion) within almost four

years of his working durations. The absence of the effective and efficient structure

and objectives in the top management revealed the corporate governance failure of

Baring Bank’s management. Consequently, the shareholders and stakeholders of

Baring Bank were being affected deemed to the failure of the corporate governance’s

management.

As a result of the failures and lack of regulatory measures from authorities, the

Committee of Sponsoring Organizations (COSO) was created. COSO is recognized

the world over and providing guidance on critical aspects of organizational

governance, business ethics, enterprise risk management, internal control, financial

reporting and fraud. Beside, developments in the US arose debate in the UK and the

scandals and collapses in UK in the late 1980s and early 1990s, led the shareholders

and banks to worry about their investment

Due to the events that led to the enhancement of corporate governance, it is crucial for

an organization and being a fundamental requirement to well-conducted companies

that could ensure they operate at optimum efficiency. The important attributes of

corporate governance including:

i. Ensure appropriateness and adequacy in the system of controls and hence

asset may be safeguarded.

ii. Prevents any single individual having too powerful on influencing people.

iii. Improve the relationship between a company’s management, the board of

directors, shareholders and stakeholders.

iv. Ensure the company is being managed in the best interests of shareholders

and stakeholders

v. Encourage transparency and accountability

Another important objective of corporate governance in an organization is the

operational risk control. Operational risk was defined as the risk of loss through:

i. Failure of systems

ii. Deliberate conduct of staff

iii. Negligent conduct of subordinates

Holding massive of operational risk in a company may have systematic implications

when the firms involve large investment with global operations. This was clearly

proven by the Barings Bank’s collapse, in which resulted from senior management’s

failure to implement internal control producers for staff. Furthermore, the top

management in Barings Bank also failed to broader the issues of ensuring that the

adequacy of complying the stated regulatory standards in all of its subsidiaries. What

is clear from Barings Bank is that, home and host country regulators must

communicate frequently and coordinate their investigations along the lines of

international standards in order to supervising the multinational conglomerates.

What are the cases similar to Barings Bank?

Societe Generale

Particular:

Société Générale is the 3rd largest Corporate and Investment bank in the

Eurozone by net banking income and the 6th largest French company by

market capitalization.

It employs 120,000 people, of which 75,000 in Europe, and maintains a

presence in 80 countries.

Located at west of Paris

Main divisions are Retail Banking & Specialized Financial Services

(particularly in France and Eastern Europe), Corporate and Investment

Banking (Derivatives, Structured Finance and Euro Capital Markets) and

Global Investment Management & Services.

Incidents:

A single futures trader (Jérôme Kerviel, a relatively junior futures trader) at

the bank had fraudulently lost the bank €4.9billion (an equivalent of

$7.2billionUS)

A series of bogus transactions that spiraled out of control amid turbulent

markets in 2007 and early 2008.

Two credit rating agencies reduced the bank's long term debt ratings: from AA

to AA- by Fitch; and from Aa1/B to Aa2/B- by Moody's (B and B- indicate

the bank's financial strength ratings).

Kerviel is exceeding his authority to engage in unauthorized trades totaling

dealt with $73.3 billion (more than the bank's market capitalization of $52.6

billion) although bank officials claim that throughout 2007, Kerviel had been

trading profitably in anticipation of falling market prices.

According to the BBC, Kerviel generated €1.4 billion in hidden profits by the

end of 2007.

His employers say they uncovered unauthorized trading traced to Kerviel on

January 19, 2008.

The bank then closed out these positions over three days of trading beginning

January 21, 2008, a period in which the market was experiencing a large drop

in equity indices, and losses attributed are estimated at €4.9 billion.

His trial began on June 8, 2010. He faces up to five years in prison and a

$450,000 fine.

Similarity with Barings

Oldest banks in France

Single rogue trader

Trader exceeded his authority

Fraudulent trade that exist market

capitalization.

Greedy and desired of making

profit for the bank.

Fraud happened to cover losses.

Differences with Barings

Société Générale does not collapse

with US bailout.

Société Générale has well

established internal audit and risk

management.

Société Générale operated in a

well establish regulatory system

requirement because it happened

on at later date (2007 & 2008).

Undiscovered fraudulent trade

method until the discovery of

fraud perpetrated by Bernard

Madoff.

Bank of credit and commercial International (BCCI)

Particular:

BCCI was a major international bank founded in 1972 by Agha Hasan Abedi,

a Pakistani financier.

Registered in Luxembourg

It operated in 78 countries, had over 400 branches, and had assets in excess of

US$20 billion, making it the 7th largest private bank in the world by assets.

Incidents:

In the late 1980's BCCI became the target of a two-year undercover

operation conducted by the US Customs Service.

This operation concluded with a fake wedding that was attended by BCCI

officers and drug dealers from around the world who had established a

personal friendship and working relationship with undercover Special

Agent Robert Mazur.

After a six month trial in Tampa, key bank officers were convicted and

received lengthy prison sentences. Bank officers began cooperating with

law enforcement authorities and that cooperation caused BCCI’s many

crimes to be revealed.

BCCI became the focus of a massive regulatory battle in 1991 and was

described as a "$20-billion-plus heist".

Investigators in the U.S. and the UK revealed that BCCI had been "set up

deliberately to avoid centralized regulatory review, and operated

extensively in bank secrecy jurisdictions.

Its affairs were extraordinarily complex. Its officers were sophisticated

international bankers whose apparent objective was to keep their affairs

secret, to commit fraud on a massive scale, and to avoid detection."

Upon the shutdown of BCCI, £760 million loss incurred (£100 million lost

by UK local authorities).

As a summary, monies laundered out of BCCI HQ bank in London

through subsidiaries in fifteen countries by eight senior executives; BCCI

shut down by Bank of England.


Collapse on fraudulent activities


Do not expose to derivates

trading.

Escaped detection for longer

period (20 years)

BCCI adopt an opaque

international structure to fragment

oversight and conceal activities

from the regulators.

More than single rogue trader

involved.

Happened before Barings

Daiwa Bank

Particular:

12th largest bank in Japan

One of the country's top city banks

Upon withdraw from all overseas banking operations; the bank now aims to

concentrate on retail banking for small firms and individuals mainly in the

Osaka region.

On December 12, 2001 consolidation of Daiwa Bank, Kinki Osaka Bank, and

Nara Bank as Daiwa Bank Holdings, Inc.

After acquiring Asahi Bank on March 1, 2002, the company was renamed

Resona Holdings, Inc. on October 1, 2002.

Incidents:

In 1995, one of Daiwa Bank's bond traders, Toshihide Iguchi, in New York

lost $1.1 billion speculating in the bond market.

The company was later indicted for not reporting crimes by Iguchi including

selling unauthorized sale of client's securities to cover losses.

Toshihide Iguchi had concealed more than 30 000 trades over 11 years starting

in 1984, in U.S. Treasury bonds.

Consequently, Daiwa Bank shuts down global operations.


A trader had - as Leeson - control

of both the front and back offices.

Happened in the same year

(1995).

Lack of internal control and risk

management over global (far

west) subsidiaries.


Escaped detection for longer

period (11 years).

Do not involve derivates but bond

market.

Holding company does not

collapse after the incidents.

Metallgesellschaft

Particular:

Metallgesellschaft AG was formerly one of Germany's largest industrial

conglomerates based in Frankfurt.

It had over 20,000 employees and revenues in excess of 10 billion US dollars.

It had over 250 subsidiaries specializing in mining, specialty chemicals

(Chemetall), commodity trading, financial services, and engineering (Lurgi).

Incidents:

In 1993, the company lost over 1.4 billion dollars after speculating increase in

oil price in oil futures market.

A subsequent drop in oil price left the company buying the oil at a higher price

than the market price.

It is a mismatch between its derivates hedges and long-term oil contracts with

customers.

The company is now part of GEA Group Aktiengesellschaft (from 2000 to

2005: mg technologies AG, before 2000: Metallgesellschaft).


Loss incurred deal to derivates

trading.


No rogue trader and fraudulent

case involved.

Happened before Barings.

Not a financial institution

involved (An industrial company

under the group).

National Westminster Bank Plc (NatWest)

Particular:

A retail bank in the United Kingdom that has been part of The Royal Bank of

Scotland Group Plc since 2000.

Established in 1968 by the merger of National Provincial Bank (established

1833 as National Provincial Bank of England) and Westminster Bank

(established 1834 as London County and Westminster Bank).

Traditionally considered one of the Big Four clearing banks, NatWest has a

large network of 1,600 branches and 3,400 cash machines across Great Britain

and offers 24-hour Actionline telephone and online banking services.

Today it has more than 7.5 million personal customers and 850,000 small

business accounts.

Incidents:

In 1997, NatWest Markets, the corporate and investment banking arm formed

in 1992, revealed a £50m loss had been discovered in its interest rate options

and swaps trading books, escalating to £90.5m after further investigations.

NatWest Markets troubles started with a systematic mispricing of various

options and swaps by traders in its rate risk management group. As losses

mounted, Kyriacos Papouis, who traded Deutschemark (DEM) interest rate

options and swaps, began to mismark options positions in the bank’s books in

a concerted attempt to cover up the losses. His supervisor, Neil Dodgson, who

traded Sterling (GBP) interest rate options and swaps, also mismarked

positions.

Investor and shareholder confidence was so badly shaken that the Bank of

England had to instruct the board of directors to resist calls for the resignation

of its most senior executives in an effort to draw a line under the affair.

By the end of 1997 parts of NatWest Markets had been sold, others becoming

Greenwich NatWest in 1998.

Similarity with Barings Differences with Barings

Internal controls and risk

management were severely

criticized.

Poor management by looking at

bank's move into complicated

derivative products that it did not

fully understand.

Fraud happened to cover losses.

More than one trader involved.

Does not collapse after the

incident.

Happened after Barings.

Longer detection period than

Barings.

What regulation has been imposed in response to the collapse of Barings Bank?

The sudden collapse of the Barings Bank brought to the sharp focus the need of

regulators to examine the problems and take concrete actions to deal with the

problems to safeguard the same case from happening again in the future.

Following the collapse of Barings Bank, regulatory authorities from sixteen countries,

who have oversight the world’s major futures and options market, met at Windsor, to

attend the meeting hosted by the United Kingdom Securities and Investments Board

and the United States Commodity Futures Trading Commission to discuss the key

issues resulting from the failure of Barings Bank and the ways to strengthen

supervision, minimized systematic risk and disruptions.

In the Windsor Declaration, the regulatory authorities addressed the issues related

to:

Cooperation between market authorities

Protection of customer positions, funds and assets

Default procedures

Regulatory cooperation in emergencies.

Cooperation between market authorities

The regular authorities agreed to improve cooperation and communications of

information relevant to material exposures and other regulatory concerns between

regulators and market authorities. The reason is an individual regulator or market

authority alone may not have information on all material exposures of market

members and consequently communications could help to minimize the effect of

market disruption caused by failures and bankruptcy.

If there is a communication between the regulators in United Kingdom, Japan and

Singapore which if they have sufficient regulatory oversight on the derivatives trading

by Nick Leeson, the oldest bank in England would have been survived.

Protection of customer positions, funds and assets

The regulator authorities will review the adequacy of existing arrangements and

enhance the arrangements appropriately to minimize the risk of loss through

insolvency and misappropriate use of assets.

Default procedures

The regulator authorities will promote and facilitate the liquidation or transfer of

positions, funds, and assets from the failing members of future exchanges to mitigate

the risk of losses due to the inability of the solvent participants in managing the

exposures to a failing market member.

Regulatory cooperation in emergencies

The regulator authorities will enhance the emergency procedures and improve the

effectiveness of international co-ordination and timely communication of reliable

information which is needed in supervisory purpose when the market is in difficulties.

In addition, the Windsor Declaration requires the authorities to promote

the following issues: (retrieved from U.S. Commodity Futures Trading

Commission)

Development of mechanisms to ensure that customer positions, funds and

assets can be separately identified and held safe to the maximum extent

possible and in accordance with national law.

Enhanced disclosure by the markets of the different types and levels of

protection of customer funds and assets which may prevail, particularly when

they are transferred to different jurisdictions, including through omnibus

accounts.

Record-keeping systems at exchanges and clearing houses and/or market

members which ensure that positions, funds and assets to be treated as

belonging to customers can be satisfactorily distinguished from other

positions, funds and assets.

Enhanced disclosure by markets to participants of the rules and procedures

governing what constitutes a default and the treatment of positions, funds and

assets of member firms and their clients in the event of such a default.

The immediate designation by each regulator of a contact point for receiving

information or providing other assistance to other regulators and/or market

authorities and the means to assure twenty-four hour availability of contact

personnel in the event of disruption occurring at a financial intermediary,

market member or market.

In short, sufficient regulatory oversight and communication as well as cooperation

between the market authorities are essential to avoid the similar case like Barings

Bank from happening. This could be done more effectively through the enforcement

of regulations or the enforcement of resolutions by an international body.

Conclusion

The collapse of Barings Bank may have not greatly impacted the regulators and the

banks to form a new regulation but it would be a great lesson for the companies and

banks all over the world to understand the importance of proper supervision and

control systems and pay more attention on the issues of corporate governance and risk

management.

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