barings bank ppt

8/18/2019 Barings BANK Ppt

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How Leeson Broke Barings

Imran Khan

14MBMA20

FIN 444


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Barings Bank, 233 year old investment bank One of the most prestigious nancial

institutions in England

Had a lot of exposure in the banking sector◦ omparatively lo! expertise in the derivatives and

international markets Barings collapsed on "ebruary 2#, $%%&, due

to the activities of one trader, 'ick (eeson◦ )alue reduced from *&++ million to *$#+ million

Background


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"ormer derivatives broker, caused thecollapse of Barings Bank

-sed to secretly trade futures contracts onboth the 'ikkei and ./B

Barings su0ered huge loss because of his

ine1ciency

Who was Nick Leeson?


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(eeson engaged in unauthoried activitiesalmost as soon as he started trading iningapore◦ Ho!ever, he !as successful in hiding his

deception (eeson !as not short on 45E6

◦ He !as long approximately the number ofcontracts he !as supposed to be short

-sed to hide unauthoried trades in anaccount named Error Account 88888

Wha Leeson did


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(eeson sold straddles, earned premium sellingover 37+++ straddles over a $8 month period

◦ 9roved to a very protable type of trading

He moved a!ay from Barings as soon as he

realied losses !ere mounting :ook advantage of the big position that Barings

had to bet against the rm :ried to sustain the market by;

◦ Buying massive amounts of 'ikkei stock indexfutures

◦ elling ./B futures, betting interest rates !ould rise

Leeson!s sraegies


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Premium earned from straddle by Leeson


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Funding < 5aintain a minimum balance inaccounts :his minimum balance is called themargin re=uirements for most exchanges imilarly,'ick (eeson !as also re=uired to maintain margin

against the positions he !as taking "redi risk # >hen the Barings (ondon o1ce used

to send the funds for margin re=uirements of theirclients in the 45E6, lending money to these clientsto trade at the exchange (eeson kept on asking for

more and more funds, !hile increasingly less andless clients seemed to be closing their positions

$oor conro% &rocedure


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Marke risk < ?isk reports !eremisrepresentations as (eeson !as in chargeof both back and front o1ce :his meantthat he !as in charge of the trading as !ellas settling the trades

No %imis < Barings did not impose anylimitations on the proprietary trading

activities of the B", because of !hich(eeson !as free to pass o0 as much tradeas he !ished into this form

$oor conro% &rocedure'con!d(


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hort term strategy developed by (eeson!hich might not be convenient on the longrun

>ith large scale investment (eeson

manipulated the market but failed to changeits trend

-nauthoried activities remained silent for along time as (eeson managed to hide it !ell

oncept of overtrading or aggressive tradingis not a !ise option as the company inclinedto!ards much risky asset management

Barings!s )a%%


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*egregaion o) )ron and +ack o,ce ->ould have e0ectively reduced the kind ofactivities that (eeson !as involved in

In.o%.emen o) senior managemen @ 4tseemed that the management !ere satised!ith the short term protA they !ereuna!are of important activities of the

company Ade/uae ca&ia% # :he institution !as infunding risk due to enormous unhedgingposition

Wha cou%d ha.e +eendone


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ougher &oor conro% &rocedure - Oneof the main reasons as to !hy this entiredebacle happened !as because themanagement !ere not accountable tocertain activities

Increased su&er.ision - 5anagement didnot step in and !ere mostly una!are of the

activities that (eeson !as involved in

Wha cou%d ha.e +een done 'con!d(


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(eeson communicated false information,eventually leading to the fall of Barings

Error account not monitored 9ayment of margin on unauthoried trade 4mproper segregation of client funds and

nancial re=uirement

5anagement not entirely involved; seriouslack of control

o sum i u&


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barings bank ppt

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