Rogue trading and misleading reporting, including the Barings case

 Rogue Trading

  • Leeson’s role expanded to conducting proprietary arbitrage trades exploiting perceived pricing differentials on futures contracts listed concurrently on the largest stock exchange in Japan (i.e., the Nikkei) and the second largest stock exchange in Japan (i.e., the Osaka Securities Exchange). 
  •  Leeson decided to take the rogue action of speculating in a directional move by only buying one asset without an offsetting short position.
  • Leeson also controlled the back-office accounting of his own trades, and he managed the reporting through a hidden reconciliation account that was never reported to the home office. What appeared to be a £102 million profit in 1994 was actually a £200 million loss. 
  • In late 1994, the risk managers at Barings Bank grew curious about the unusual gains that Leeson was producing relative to the types of trades he was making.
  • Risk managers continued their interest when, in January 1995, Leeson reported an unusual profit of £10 million in a single month. Once again, their concerns were dismissed.
  • The actual losses grew so large that the bank was forced to liquidate. A Dutch Bank, ING, acquired Barings Bank
  • If profits appear to be either outsized or strangely consistent, then scrutiny is needed to ensure that the books are being kept correctly. 
  • There should also be an independent verification mechanism, and the back-office should never be controlled by front-office (i.e., traders) influencers

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