The Rogue Trader Essay

The Rogue Trader

In 1992, a twenty-eight-year-old trader in the Singapore office of Barings Bank, Nick Leeson, lost over $1 billion of the firm’s money through transactions in futures contracts. Initially, Leeson had made large profits for the bank by dealing in derivatives and futures. After experiencing losses, however, he used an error account 88888 to disguise his bad trades. Because Leeson was involved in the settlement of his own trades, he was able to sustain this scheme until he left the firm in 1995. As a result of Leeson’s losses, Barings eventually was declared bankrupt and sold to the ING Group for just one pound sterling.

The Barings collapse confirmed that internal controls at Barings were clearly insufficient to detect what was taking place with Leeson’s derivatives trades. Leeson acted as general manager, head trader and de facto head of the back office eliminating the necessary checks and balances usually found within trading organizations, a clear violation of a fundamental principle of risk management which constitutes a breach in segregation of duties in financial and operational controls.

The idea behind segregation of duties is to prevent any one person abusing a position of authority enabling ultimate control and knowledge of specific operations at any one time. Usually different people perform these tasks, but Baring’s management failed to see the conflict of interests befalling one undertaking multiple roles.

Where a lack of segregation of duties exist, the person making the buy and sell decisions does so at their own discretion. Normal circumstances require prior checks and balances by different hierarchical authorities to reduce likelihood of bad decisions which are based on Management’s plan and approval. The management of Baring’s should have not allowed a single individual to have multiple control. Management should have realized that this type of arrangement would pose a risk, as a temptation for dishonest trading practices...