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This was due to not being able to meet the obligations of trading, Lesson opened on behalf of the Bank. Nicholas William Lesson, which is popularly called Nick Lesson have do dark transaction, which is actually outside its authority in 1992. Shortly, after he was allowed to trade derivatives at Barings Futures Singapore (BBS), a business unit of Baring Bank who runs the Bank’s activities in SIMMS (Singapore International Monetary Exchange). 2. What are the management boards of Bearing’s mistakes in this case?
ANSWER : Management boards of Bearing’s mistake in this case is Barings top management do not understand about the proprietary business (transactions for its own sake). If Barings’ auditors and top management understand the business of trading, they would know that it is impossible for Lesson to makes a profit as he reported, if not taking greater risks as well. Top management and auditors should question where it came from such earnings. Lack of knowledge about the business of trading in Barings is reasonable given that most senior managers have a background Barings merchant banking.
The members of the Assets and Liability Committee (ALCOA), which monitors the market risk expressed concern about the mount of the position taken by Lesson, but then feel uncomfortable with the idea that the exposure to market risks Barings relatively small because Lesson top hedge these positions. Besides, there is no internal mechanism of checks and balance. Barings management violated an important rule in the business of trading by let Lesson conduct settlement transactions are done on its own. This happens because Lesson holds authority in dealing desk and the back office.
Briefly back office should perform the necessary checks to prevent unauthorized ramifications and minimize the potential for fraud and embezzlement. Because Lesson control back office and because Barings did not have an independent unit to check the accuracy of the report Lessons, then report on market risk generated by the risk management unit Barings be inaccurate. Lack of supervisory employee’s control. Lesson has never had a license to conduct transactions before his assignment to Singapore, but its activity had little oversight and no specific individual who is directly responsible for monitoring the strategy Lesson transaction.
In addition, Lesson many transactions are actually outside authority, such as the purchase and sale of options. The lack of clear transaction report lines. Lesson illegal transactions may be facilitated by the chaos caused by the presence of two reporting lines, one to London for proprietary transactions and another one to Tokyo for transactions made on behalf of clients. Barings control procedure is very poor. This is seen when the cover losses from positions that were made illegally by Lesson.
Headquarters does not require Lesson distinguish between variation margin required to cover heir own positions and transactions on behalf of clients. Barings also does not have a system to consolidate funds requested Lesson with his position report. If the Head Office in London have been using a program called margin determination Portfolio Risk Analysis Standard (Standard Portfolio Analysis of Risk) to calculate the margin, the Central Office will be aware that the amount of money requested Lesson much larger than the existing rules on SIMMS margin. There is no limit through transactions.
Barings did not set a limit for the position Lesson proprietary transactions because they do not bear the risk of the market for arbitrage transactions. Indeed arbitrage transactions terrapin only a very small market risk, but the transactions contain basic risk and settlement risk. Basis risk occurs when prices in the two markets do not always move together or at the same rate, while the risk of settlement occurs because different markets have different settlement systems, so that it can create liquidity and funding risk. 3. What are lessons learned, in the context of corporate governance from this case?
ANSWER : Basically, bank is an institution that the risk is very high. Therefore also including a high regulated. Every time the central bank should enhance its rules, but the main factor is the human factor. Nick Lesson previously deemed a child prodigy, very smart, unfortunately his intelligence had done for the poor side. In one hand, from the results of the Agency established by the Central Bank K, looks really do not master the Barings Bank trading, so a lot of the rules are easily broken by Nick Lesson. Furthermore, the role of IT is very large nowadays.
So people cannot abuse the authority, means of a lock system at the limit of its authority by given the password. Password should not be loaned. The reason manager was not in the office. So it is should remain delegated to subordinate certain amount of authority and a password replacement is done in any given period. Lastly, as a learning for us is significant of a system which can control the operations of a bank or company. Built in control is necessary, in order to check and balance always occurring internally, which allows each instance of an error can be detected.