An agreement between two different parties which
the value of the instrument is determined by
contingent future outcome of particular underlying
Types of Derivatives Market
Fulfill the need of both side
Largely unregulated market
Acts as an intermediary
Provides information of the trading
Example: Chicago Board of Trade, Chicago
Mercantile Exchange, Korea Exchange
To speculate and make profit
due to the changes of the value
of the underlying assets.
To hedge the underlying asset as
whole or part of it.
To exposure to underlying asset
which it is not possible to trade
in the underlying asset market.
Act as agent in derivative trading
Creating derivative contracts
Provide advisory services
Performing risk management - clearing-house
Compliance with the exchanges’ rule and regulation
Perform trade confirmation
Established in London in 1763
Britain oldest Merchant Bank
Leading Merchant Bank
By 1989-established trading operations
February 1995-discovered huge fraud
Son of a working class plasterer from a Watford council estate
Worked as a clerk with Royal Bank Coutts
Spent two years at Morgan Stanley
In 1989-joined Baring Securities Ltd (BSL)
First quarter of 1992-posted to Baring Futures Singapore Ltd (BFS)
Be a unauthorized speculative trades that at first made large
profits for Barings
He earned a bonus of £130,000 on his salary of £50,000 in 1992
Sent Barings Bank to bankruptcy
In 1992, Nick Leeson went to Barings Bank'
Responsible for derivative trading
of Singapore and Japan
Nikkei 225 contract traded on SIMEX and OSE
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.
Buy and sell
In 1992, suffering first loss of $20,000
Create error account –account “88888”
In 17 Jan 1995, Kobe earthquake in Japan
In 20 January 1995, Nick Leeson decided to
double up the long position to 55,206
March 1995 and 5,640 June 1995 contracts
Margin calls about $835m
was required by SIMEX.
Barings Bank was collapsed in
26 February 1995
ING, a Dutch bank, purchased
Barings Bank in 1995 for the
nominal sum of £1
Nick Leeson was sentenced to
six and a half years in prison in
1. No Segregation of duties
• Nick Leeson– Floor manager & back office settlement operation
• Internal auditor of Barings Bank, James Baker
• Recommended that the General Manager should not
responsible for the back office
• recommendations were never been implemented.
• At Singapore - not taken any significant steps
1. Norris, Chief Executive Office of Barings Investment Bank (BIB)
2. Broadhurst, Group Finance Director of Barings Investment Bank (BIB)
3. Hopkins, Director of Group Treasury and Risk of Barings Investment Bank (BIB)
4. Barnett, Chief Operating Officer of Barings Investment Bank (BIB)
5. Ron Baker, Head of Financial Product Group (FPG)
No segregation of
Deficiencies of internal
control in Barings
Create operational risk
and fraudulent risk
segregation of duties
in an organization
review of internal
2. Unauthorized trading activities
Sign off on
Leeson's Positions as at End February 1995.
Number of contracts1
nominal value in US$ amounts Actual position in terms of open interest of relevant contract2
49% of March 1995 contract and 24% of June 1995 contract.
85% of March 1995 contract and 88% of June 1995 contract.
5% of June 1995 contract, 1% of September 1995 contract and 1% of
December 1995 contract.
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
By just one
who is both
buyer and seller
Executed on the
Member must declare
the prices for three times
Must be executed at
No. of contracts
20 January 6984 18950 19019 66173 66413 240
23 January 3000 17810 18815 26715 28223 1508
23 January 8082 17810 18147 (71970) (73332) (1362)
25 January 10047 18220 18318 91528 92020 492
26 January 16276 18210 18378 148193 149560 1367
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”.
3. Lack of Understanding on Derivatives
loss if price
Lack of understanding on
Cannot provide proper
guidance and recommendation
in activities done by Nick
Create operational risk and
should be sent to
training or attend
courses to enhance
1. Anybody who was supposed to have some control over his activities
was going elsewhere.
2. The people who were looking after the traders were based in London.
3. The people in charge of the compliance function were in London.
4. The risk management areas were in Tokyo
5. He was both the senior trader and settlements person in Singapore
4. Poor supervision of employees and lack of senior
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
ii. Initial margin requirement of account “88888” was in
excess of US$342 million.
SIMEX’s senior vice president for audit and compliance, Yu Chuan Soo,
•Coopers & Lybrand
•Due from Spear, Leeds & Kellogg (a US investment
•Had not been received
•BFS (through Leeson), had traded (or broken) an over-the-counter deal
•Spear, Leeds & Kellogg and BNP, Tokyo
• Involved 200 of 50,000 call options
•The second version is, an ‘operational error’ had occurred
• A payment had been made to a wrong third-party in December 1994
• Based in Tokyo and experienced in the operation of Japanese markets
• Analyzing the risks on Leeson’s intra-day trading activities
• Did not have a clear understanding of his duties in supervision
over BFS’s trading activities
• Argued that he was responsible for supervising Leeson’s switching
Lack of supervision from
Top management failed
to implement their
Create operational risk
and fraudulent risk
should have proper
(Lack of knowledge
- Audit firm should send auditors to
attend related courses to enhance
their professional knowledge
- Send specialized skills auditors to
audit particular industry
Ethical point of views
• 3rd largest Corporate and Investment
bank in the Eurozone
• Futures trader– Jérôme Kerviel
• Engage in unauthorized trades totaling
dealt with $73.3 billion (more than the
bank's market capitalization of $52.6
Does not collapse with US bailout.
Has well established internal audit and
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.
Oldest banks in France destroy by single
Trader exceeded his authority
Fraudulent trade that exist market
capitalization cover losses.
Greedy and desired of making profit for
• 12th largest bank in Japan
• Daiwa Bank's bond traders– Toshihide
• Toshihide Iguchi had concealed more
than 30 000 trades over 11 years starting
• Consequently, Daiwa Bank shuts down
Escaped detection for longer
period (11 years).
Do not involve derivates but
Holding company does not
collapse after the incidents.
A trader had - as Leeson -
control of both the front and
Happened in the same year
Lack of internal control and risk
management over global (far
• Largest industrial conglomerates based
• Lost over 1.4 billion dollars after
speculating increase in oil price in oil
• Mismatch between its derivates hedges
and long-term oil contracts with
• Windsor Declaration
▫ Hosted by:
United Kingdom Securities and
Investments Board and
United States Commodity Futures
▫ Attended by:
Regulatory Authorities from 16
• Windsor Declaration
To discuss the key issues resulting from
the failure of Barings Bank and
The ways to strengthen supervision
The ways to minimize systematic risk
• Windsor Declaration
Cooperation between market authorities
Protection of customer positions, funds
Regulatory cooperation in emergencies.