An interesting read nigh a as well as therefore 28 yr old guy who ruined UK's oldest depository fiscal establishment alongside his unmarried trade, Courtesy NISM
Nicholas Leeson, had good established rail tape of beingness a savvy operator inward the derivatives marketplace seat as well as was the favourite of the overstep management at the Barings Bank headquarters at London. He was the caput of derivatives trading, responsible for both front end as well as dorsum office, at Barings Futures, Singapore (BFS), a subsidiary of Barings Plc., London.
Leeson engaged himself inward proprietary trading on Tokyo Stock Exchange Index, Nikkei 225. He was operating simultaneously on Singapore Exchange – Derivatives Trading Ltd., (SGX – DT) (erstwhile Singapore International Monetary Exchange, SIMEX), Singapore as well as Osaka Securities Exchange (OSE), Nihon inward Nikkei 225 futures as well as options. His offense started dorsum inward 1992, when he was roofing upwardly for a junior colleague who lost £20,000 on the trading flooring ane day. Leeson ready the mistake trouble concern human relationship 88888 to cover the bad trade, simply as well as therefore he started using it himself.
Any bad merchandise he could cover inward this account, which bizarrely was never checked past times a compliance officeholder or senior management, by as well as large because Leeson was inward accuse of the Singapore dorsum part himself. By Christmas 1994, Leeson was sitting on losses of £280 ane G 1000 – catastrophic simply non fatal for the bank, which had nigh £350 ane G 1000 to its name.
A major part of Leeson’s trading strategy involved the sale of options on Nikkei 225 index futures contracts. He had sold large reveal of options straddles (a strategy that involves simultaneous sale of both telephone cry upwardly as well as position options) on Nikkei 225 index futures. Without going into intricacies, it may live understood that this straddle seat results inward loss, if marketplace seat moves inward either management (up or down) drastically. His strategy amounted to a bet that Japanese Stock Market would neither autumn nor teach up, substantially i.e. he had the stable toll perspective towards Japanese Market.
The Japanese stock markets started falling on the word of a vehement earthquake inward Kobe, Japan. With futures on Nikkei 225 going down, his straddle seat started incurring loss. In pursuit of turn a profit from his straddles, he started supporting the index past times edifice upwardly extraordinarily huge long positions inward Nikkei 225 futures on both the said exchanges SGX – DT as well as OSE. However, the management of Barings was made to empathise that Leeson was doing Nikkei 225 index futures arbitrage betwixt SGX-DT as well as OSE.
When OSE regime raised warning nigh his huge long positions on the telephone commutation inward Nikkei 225 futures, he claimed that he had built upwardly just contrary positions inward Nikkei 225 on SGX - DT i.e. if his positions inward Nikkei 225 at OSE endure losses, these losses would teach compensated past times the profits of his positions at SGX - DT. Similar impression was given to the SGX - DT authorities, when they inquired nigh Leeson’s positions.
Leeson kept giving misleading data to both the exchanges as well as neither of the exchanges bothered to crosscheck Leeson’s positions on the other telephone commutation because they were competing for trouble concern inward Nikkei 225. Both the exchanges were to a greater extent than concerned nigh the protection of their fiscal integrity than anything else as well as so, allowed fifty-fifty the exceptionally large positions to Leeson afterward securing adequate margins.
The lawsuit is known to everyone. Single operator could non accept the marketplace seat inward his desired management as well as marketplace seat brutal downwards drastically. Result was, Barings blasted past times registering an astonishing £832 ane G 1000 loss on Leeson’s both futures as well as straddle positions.
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