2. Founded in 1762 by Sir Francis Baring The oldest mercantile bank in London until its collapse in 1995 Nick Leeson in 1990s lost $1.4 billion speculating primarily on futures contracts. 3. Derivative trading by Barings The chain of events which led to the collapse of the bank The control and risk management lessons to be learnt from this collapse 4. In 1802, it helped finance the Louisiana Purchase Panic of 1890-- efforts in underwriting got the firm into serious trouble through overexposure to Argentine and Uruguayan debt Ties with King George V and British Monarchy 2 nd World War saw the British government using Barings to liquidate assets in the US and elsewhere to finance the war effort 5. Financial instruments whose value changes in response to the changes in underlying variables Derivatives fall into two major categories over-the-counter (OTC) derivatives (swaps) exchange-traded derivatives (futures) Since mid-80s volumes and value of futures,options and swaps contracts traded have increased astronomically 6. Barings was brought to its knees by Nick Leeson in a Singapore office He was employed by Barings to profit from low risk arbitrage opportunities between derivatives contracts on the SIMEX and Japans Osaka Exchange Leeson left a $1.4 billion hole in Barings balance sheet due to his unauthorized derivatives speculation,causing the 233-year-old banks demise 7. He grew up in Londons Watford suburb Worked for Morgan Stanley after graduating university Leeson then joined Barings (Jakarta) to sort through back-office mess involving 100 million of share certificates Successfully rectified the situation in 10 months Then transferred to Singapore and worked with a lot of power & freedom 8. Was supposed to be arbitraging Instead of hedging, gambled on the future direction of the Japanese markets Had long futures positions on OSE Was not short on SIMEX Kobe earthquake of January 17, 1995 led to the crash of Nikkei and his investments 9. Used account no. 88888 for unauthorized speculation to cover losses Ended with huge losses(GBP 827 MM) The activities of Nick Leeson led to the fall of Barings Leeson after being arrested for his activities 10. Use of Cross Trade Breaking down the total number of contracts into several different trades Changed the trade prices thereon to cause profits Profits credited to 'switching' accounts & losses to be charged to account ' 88888 Details of this account were never transmitted to the treasury or risk control offices in London 11. Effectively let Leeson settle his own trades by putting him in charge of both the dealing desk and the back office He had the final say on payments, ingoing and outgoing confirmations and contracts reconciliation statements accounting entries position reports Leeson was considered perfectly placed to relay false information back to London 12. The Board of Banking Supervision conducted an inquiry Did not necessitate any change to the framework of regulation Some existing arrangements needed to be improved Like better understanding of non-banking businesses undertaken by the banking groups they were responsible for 13. A number of important lessons for senior bank managers including the importance of internal controls & audit processes We think the following should be avoided by ba nks Lack of internal checks and balances Lack of understanding of the business Poor supervision of employees Lack of a clear reporting line 14. Leeson was convicted of fraud and sentenced to six and a half years imprisonment Film made on Leesons biography, Rogue Trader Fall of Barings was a wake-up call for financial institutions all over the world The trading and back office functions were not delineated in Barings leading to its collapse 15. Management wanted to enter a new market but Bank was not prepared for the activity on a derivate market Stronger competition search additional profits gave so much control only to the one person Derivates in recent years a powerful tool in the hands of traders Strict regulations are needed in order to avoid the next Barings 16. Thank You!!

Definition of 'Derivative'

A security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. Most derivatives are characterized by high leverage.

1. The Barings Bank Collapse - A Case Study Finance Project, 2008 Instructor: Prof. Gopal K. Basak Report prepared by: Dwaipayan Ghosh (QE0701) Uday Tharar (QE0703) Priyam Banerjee (QE0705) Programme: M.S. (Q.E.) 2 nd Year 2. Founded in 1762 by Sir Francis Baring The oldest mercantile bank in London until its collapse in 1995 Nick Leeson in 1990s lost $1.4 billion speculating primarily on futures contracts. 3. Derivative trading by Barings The chain of events which led to the collapse of the bank The control and risk management lessons to be learnt from this collapse 4. In 1802, it helped finance the Louisiana Purchase Panic of 1890-- efforts in underwriting got the firm into serious trouble through overexposure to Argentine and Uruguayan debt Ties with King George V and British Monarchy 2 nd World War saw the British government using Barings to liquidate assets in the US and elsewhere to finance the war effort 5. Financial instruments whose value changes in response to the changes in underlying variables Derivatives fall into two major categories over-the-counter (OTC) derivatives (swaps) exchange-traded derivatives (futures) Since mid-80s volumes and value of futures,options and swaps contracts traded have increased astronomically 6. Barings was brought to its knees by Nick Leeson in a Singapore office He was employed by Barings to profit from low risk arbitrage opportunities between derivatives contracts on the SIMEX and Japans Osaka Exchange Leeson left a $1.4 billion hole in Barings balance sheet due to his unauthorized derivatives speculation,causing the 233-year-old banks demise 7. He grew up in Londons Watford suburb Worked for Morgan Stanley after graduating university Leeson then joined Barings (Jakarta) to sort through back-office mess involving 100 million of share certificates Successfully rectified the situation in 10 months Then transferred to Singapore and worked with a lot of power & freedom 8. Was supposed to be arbitraging Instead of hedging, gambled on the future direction of the Japanese markets Had long futures positions on OSE Was not short on SIMEX Kobe earthquake of January 17, 1995 led to the crash of Nikkei and his investments 9. Used account no. 88888 for unauthorized speculation to cover losses Ended with huge losses(GBP 827 MM) The activities of Nick Leeson led to the fall of Barings Leeson after being arrested for his activities 10. Use of Cross Trade Breaking down the total number of contracts into several different trades Changed the trade prices thereon to cause profits Profits credited to 'switching' accounts & losses to be charged to account ' 88888 Details of this account were never transmitted to the treasury or risk control offices in London 11. Effectively let Leeson settle his own trades by putting him in charge of both the dealing desk and the back office He had the final say on payments, ingoing and outgoing confirmations and contracts reconciliation statements accounting entries position reports Leeson was considered perfectly placed to relay false information back to London 12. The Board of Banking Supervision conducted an inquiry Did not necessitate any change to the framework of regulation Some existing arrangements needed to be improved Like better understanding of non-banking businesses undertaken by the banking groups they were responsible for 13. A number of important lessons for senior bank managers including the importance of internal controls & audit processes We think the following should be avoided by ba nks Lack of internal checks and balances Lack of understanding of the business Poor supervision of employees Lack of a clear reporting line 14. Leeson was convicted of fraud and sentenced to six and a half years imprisonment Film made on Leesons biography, Rogue Trader Fall of Barings was a wake-up call for financial institutions all over the world The trading and back office functions were not delineated in Barings leading to its collapse 15. Management wanted to enter a new market but Bank was not prepared for the activity on a derivate market Stronger competition search additional profits gave so much control only to the one person Derivates in recent years a powerful tool in the hands of traders Strict regulations are needed in order to avoid the next Barings 16. Thank You!!