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Finance House of
India
Barings Bank
&
Nick Leeson
Introduction
• Barings Bank, the oldest
merchant banking company in
England, was founded in1762
• The Bank wanted to become one of the first active banks in this
region of the world and also from this reason the board gave a
trader a lot of freedom in his activity. In 1993, Nick Leeson was
appointed general manager of the bank's Barings Futures subsidiary
in Singapore.
• Leeson created an error account numbered “88888” as a holding area for any premiums
or losses that he made. A trader claimed that he initially had opened the account to
conceal a single loss of 20,000 pounds sterling that had resulted from an accounting
error until he could make up the difference through trading. However, he continued
booking various losses on the account and also continued to increase his volume of
trading and level of risk taking.
• Leeson increased the size of his open positions even as his losses increased due to
volatility in the markets. When an earthquake (23 January 1995) in Japan caused a steep
drop-in the Nikkei 225 equity index, Leeson's unauthorised trading positions suffered
huge losses and his operation unravelled.
• On March 3, 1995, the Dutch bank ING purchased Barings for the princely sum of £1,
providing the final chapter in the story of the 223-year-old bank.
Conclusion
• This was a wake-up call for many financial institutions all over the
world.
• Leeson had control over both the trading desk and the back office.
• The function of the back office is to confirm trades and check that all
trading activity is within guidelines. In any serious bank, traders have
limited amount of capital they can deal with and are subject to
closely supervised “position limits”.
• To avoid conflicts of interest, the trading and back office functions are
clearly delineated.
informationandtransactionsmeantforthebranches, tracksbalances.
Themerchantdeskisalsorequiredtomakesurethatthebranchesputthroughtransactionsonlyatthe
•
permittedrates. Tothatextent, theyarerequiredtoscrutinizereportsemanatingfromthebranches. Provisional
ratesarefinalisedtothemerchantdesk. CompetitiveratesareofferedtocustomersatthebranchesbytheIBD/
FDthroughthemerchantdesk, whichcarriesoutthistaskinconsultationwiththedealingroom.
Branchofficesofcommercial bankshavelimitedreasonstoinitiatetransactionsontheirown
•
account. Themajorityof transactionsareonaccountof theirclients. Transactionsalsoarise
overseasmeantforcustomersatvariousbranchofficesofabank.
reportingofthesetransactionsbytheoriginatingbranchestotheirrespectivemerchantdesks.
• Clearance of trade
comparison and
matching , trade
netting , securities
message and if
applicable
securities lending.
Steps involved
• First part is trade
comparison and matching
with both counterparties.
• Next step may involve
netting of trades.
• Check to ensure that
transactions are
appropriately executed.
• Transfer of ownership.
Take an example of BNP Paribas
Securities Services
Deal with transactions upon the clients’ request
Booking of transactions involving securities (shares,
bonds, UCITS) that have been executed by the front
office (purchase and/or sales orders)
Registration of transactions in the electronic
settlement systems
Ensure timely feedback of information, alerting the
front office to any difficulties encountered
Contribute, within your team, to improving the
efficiency and reliability of all financial transactions
carried out
Conclusion
Thank You