Tuesday, May 5, 2020

Barings Bank Scandal for Crime and Corruption- MyAssignmenthelp

Question: Discuss about theBarings Bank Scandal for Crime and Corruption. Answer: Baring bank based in London is understood to be one of the most reputable and established oldest global merchant banks formed in 1762. The bank was owned by the Baring family members and any worker was assumed to be from this descend and this led to employment of semi-skilled Baring descendants employees (McNeil, Rudiger Paul 123). The bank collapsed upon a set-back of amount tuning to 827 million pounds resulting from a poor speculative investment strategy in futures contracts geared by Nick Leeson one of the its employees due to lack of duty segregation as he was empowered to be in charge of both front and back offices undertakings in the bank branch situated in Singapore. The Chronology of Barings collapse can be explained as follows: 17 September 1986: This era saw the incorporation of the Baring Futures in Singapore. July 1989: this period saw an outsider from the Barings family, Nick Leeson joining the company based in London. April 1992: Leeson was transferred into the Singapore Baring based branch. July 1992: Leeson formed an error account termed as, Account 88888. By the end of 1992 September: Losses amounting to 8.80 million dollars was concealed in the error account resulting from Leeson trade. End December 1994: The losses had aroused to unbelievable figure of S$373.9 million. January 1995: Leeson was seen investing too much on Nikkei 225 index (Huan, Parbonetti Previts, 2015). 17 January 1995: Kobe earthquake made Nikkei 225 to plunge. 23 February 1995: Leeson had no option but to fly with his wife to Malaysia. 24 February 1995: An error account hidden by Leeson was revealed upon audition by one of the internal employee. 26 February 1995: Barings had no option but to be transferred into administration. 27 February 1995: This period saw BFS being rendered to judicial management and subsequently the company went bust with an amount of loss reported to be S$2.2 billion. 2 March 1995: Leeson and his wife were under arrest in Frankfurt. 6th March 1995: The ING Group, Dutch finance group took over the management of Baring. The cause of the scandal was primarily due to lack of oversight. Leeson was left to do everything ranging from clearance, booking and reporting several trades keeping, and trade futures. He further control over payments, reconciliation, ingoing and outgoing confirmation and contracts and accounting entries. Futures Contracts The futures contract describes a lawfully binding contract bringing together two participants to sell and buy a given financial instrument or commodity at a particular future day at the price already arrived at today. Futures contracts remain instruments designed to permit management of some risk attributed to financial instruments and commodities. Speculators are as well as buying and selling futures contracts to reap from movements of prices. Speculators avail liquidity in this market (Cragg, Idemudia Best, 2016). The future contracts price draws from underlying physical market item. For instance, the gold futures price is anchored on price of gold in physical market. In case of a change in a price of gold, the associated futures contract prices shall as well as alter. From the perspective of the risk management, in case the gold price rises in physical market, the underlying fold future contract value shall drop. The 2 price alterations balance each other hence eliminating price uncertainty risk. Future exchanges tend to offer their individual set of futures contacts thereby providing the enormous array of contracts for risk management. Within Australian market short-run medium as well as long term rates of interest is hedged by means of ninety-day bank acknowledged bill contract, the three-year Commonwealth Treasury bond contract or 10-year Commonwealth Treasury bond contract in that order (Walker Walker, 2017). Basic Rules Explain This Rule The basic rule to be adhered to when establishing the hedging strategy is to carry out the transaction in the future market presently which corresponds with what one intends to undertake in the physical market at a future date. Where a borrower schemes to sell its paper for instance, bills or the corporate bonds for raising funds, then he will sell the future contract presently for covering the rate of interest risk exposure where he actually issues the said paper (Rick van den Brink, 2015). The hedger shall close-out the open futures stance by purchasing a similar futures contract where he issues the said paper. In case an investor schemes to purchase certain shares where surplus funds are availed yet is concerned the price of the share will increase in the meantime, he can purchase futures contracts presently. The open stance will be closed-out where the real shares are brought by selling the conforming futures contracts. Procedure The trading of the futures contract takes place on the formal exchanges like SFE. A market order shall be placed with the broker to purchase or sell the given contract. The transactions are carried out by the open outcry on the floor of exchange like CBOT or in electronic trading platform of exchange like SFE. The great portion of exchange currently utilize the electronic trading systems, nonetheless, the hugest exchanges, CME and CBOT utilize open outcry. The electronic trading system matches orders of buy and sell automatically. Particulars of each transaction the get recorded by clearing house of the SFE. This house guarantees transactions via marginal calls and novation processes. Novation describes the agreement for replacing one party to the contract with another one. The price of full futures contract is never paid; instead an original margin gets deposited with the clearing house. The margin remains adequate for covering immediate negative movements in prices of contract where it is essential for clearing house to close-out the position for the underlying client (Rick van den Brink, 2015). The clearing house will subsequently mark to market contract on a daily basis. The margin calls maintenance might be made by clearing house needing a broker to top-up an initial margin. This is needed where the prices of the contract has shifted against the client as well as the initial margin cease to be sufficient. Implications of Being Long or Short in a Futures Contract A trader in a long in a futures contract shall be exposed to losses as well as margin calls in case the underlying asset price drops. A long contract position remains obliged to purchase underlying asset; hence they remain exposed to risk that market prices decline beneath contracted prices of futures. Procedures for Closing out these Positions Prior to Delivery The broad majority of open futures position remain closed-out by client prior to date of expiry via taking the reverse contract. A long position happens where the underlying asset has already been bought forward, that is, a buy futures contract. A party involved in a long position shall closeout that open position though the sale of another futures contract with identical product and date of expiry. A short position takes place where underlying asset has already been sold forward. The short position is closable out by going long a future contract with identical commodity as well as date expiry (Nguyen, 2014). Barings Management Duty Failure The Bank malformed due to inability to meet exorbitant trading debts established by Leeson in the behind a bank. The cause of the scandal was primarily due to lack of oversight. Leeson was left to do everything ranging from clearance, booking and reporting several trades keeping, and trade futures. He further control over payments, reconciliation, ingoing as well as outgoing confirmation besides contracts and entries of accounting. The management failed to segregate front office as well as back office alongside the senior management were never involved at all. There was a poor control procedure and lack of supervision (Pollard, 2016). The management breached the cardinal principle of any given trading operations by successfully letting Leeson settling his individual trade by placing him in the charge of back office and desk for dealing. This was tantamount to permitting the individual working a cash till to the bank in the day undertakings in absence of an autonomous third-party evaluating whether quantity banked it at lapse of day reconciled with till receipt. The back office accounts would have confirmed and settled trades executed by front-office as well as reconciled them with particulars sent by the counterparties of the bank while assessing accuracy of price utilized for its valuations internally (Pai Tolleson, 2015). By letting Leeson to be in charge of back office, he had ultimate decision on various payments, negating as well as outgoing confirmation alongside contracts, reconciliation statements, entries of accounting as well as position report. Management thus undesirably and perfectly positioned Leeson to relay misleading or false info back to London. Lesson thus abused his position as the back offices head thereby suppressing info on 88888 account created in July 1992 and nominated as error account in Barings Futures Singapore system yet as a Barings London client account in system of Simex. Management at London failed to acknowledge the existence of this error account because Leeson had requested Dr. Edmund Wong (consultant) to get rid of the error account from everyday report that sent by BFS to London electronically. Importance of Risk Management Risk management is important to the long-run a corporations survival since it allows timely risk identification for effective risk treatment hence barring the company like Barings from collapsing. Nature of Risk/ Risk Management Purpose The credit-risk insinuation of client early payment denoted by top up balances was important in case entire funds dispatched to Singapore were to meet unpretentious customer margin calls. Unfortunately, department of credit-risk never queried the reason Barings lent more than five-hundred million US dollars to the customers for trading on the SIMEX, yet receiving solely ten percent in return. It never appeared to have the notion of who such clients were, but Barings financial losses would have been important in case certain clients ducked. The Committee of credit risk under the leadership of Maclean George insisted that it was a key policy of Barings to finance customer margins till they might be gathered. Nevertheless, not restrain or entire top up funds were established. In fact, customers who were given money in advance in this manner seemed never to have endured any given process of credit approval. This committee ought to have officially taken into account credit aspect of top up balance though they might see development of such loans as logged on balance sheet. Barings Securities credit risk control remained shambolic. The market risk was also a problem since Leeson regulated back-office and since Barings lacked any autonomous unit examination of correctness of his report, the generated market-risk report by risk management unit of Barings as well as communicated to the ALCO remained imprecise. Futures positions of Leeson indicated no market risk since trades remained allegedly balanced by conflicting dealings on additional exchange. Who is Responsible? The risk management objectives, policies, procedures and strategies in a corporation are the responsibilities of the risk management unit of the organization. This unit include the credit and market risk committee and securities credit risk control committee. The credit risk committee was under the leadership of George Maclean. Nick Leeson Case: Comment on Logic and Reasons It is necessary to identify, measure and manage risks. Identification of both credit risk and market associated with Baringss failure could have been avoided if identification, measurement and management were done before the actual operation was done by Leeson. The Main Functions of Capital: Capital has two aspects. The organization must have adequate capital to withstand influence of negative market moves on its outstanding positions and sufficient money to keep such positions going. The management of Baring thought the positions of Leeson were market neutral and hence quite excited to fund margin needs till expiry of contracts. Eventually, such collateral calls from the SIMEX alongside OSE validated too much to bear since they were larger than capital base of Barings forcing the 200-year old organization to call in receivers (Stein, 2016). Existence of adequate capital would have barred such a funding risk that wounded seriously Barings giving room to the terminal shot following the discovery of huge unhedged positions. Thus, the need for interim funding needs of hedged and semi-hedged positions. Basel Ii Capital Accord Framework It is mainly the recommendation on banking besides regulation that Basel Committee issued on banking supervision. Its intention was to amend the global standards controlling the quantity of capital banks must hold to guard against operational and financial risks facing banks. It sought to make sure that the greater the risk to which the bank is exposed, the huger the quantity of capital needed by banks to safeguard solvency as well as economic stability by ensuring sufficient capital for risk facing banks via its lending, trading as well as investment activities. It is three pillars; 1st-mimiminum capital requirement; 2nd-supervisory review and 3rd-market discipline. Credit risk describes that risk of default on debt that might emerge from a borrowers failure to pay required amount. Banks compute via either standardization, foundation, advanced IRB or general IB2 restriction. Operational risk describes risk of an alteration in value triggered by fact that real losses due to insufficient/collapsed internal process, individual besides systems or from outdoor events vary from anticipated losses. It is computed via either basic indicator (BIA) or Standardized (TSA) or the internal measurement method. Market risk describes those risk of losses in position emerging from market price movements. It is arrived at via value at risk method or VaR (Banerjee Tooze, 2017). Types of Acceptable Capital Under Basel- and Basel III capital accords, the minimum risk-based ratio of capital is eight percent. The minimum six percent is held in form of Tier 1 which is the highest quality core capital for instance shares and retained earnings- increased from four percent of the Basel II. The remainder can be held in form of Tier 2 or the supplementary capital. References Banerjee, A., Tooze, A. (2017). The First Modern Bailout: The Barings Crisis of 1890 and the Bank of England. Cragg, W., Idemudia, U., Best, B. (2016). Confronting Corruption Using Integrity Pacts: The Case of Nigeria. Crime and Corruption in Organizations, 297-322. Governance, C. (2016). Corporate Governance. Huan, X., Parbonetti, A., Previts, G. (2015). Understanding the LIBOR Scandal: The Historical, the Ethical, and the Technological. Nguyen, T. N. (2014). A different approach to information management by exceptions (toward the prevention of another Enron). Information Management, 51(1), 165-176. Pai, K., Tolleson, T. D. (2015). Indias Satyam Scandal: Evidence the too Large to Indict Mindset of Accounting Regulators is a Global Phenomenon. Review of Business and Finance Studies, 6 (2), 35-43. Pollard, N. (2016). Lessons from the Downfall of BSI in Singapore. CFA Institute Magazine, 27(3), 13-13. Rick, S., van den Brink, G. J. (2015). Mitigating rogue-trading behavior by means of appropriate, effective operational risk management. Stein, M. (2016). Towards a Socioanalysis of Money, Finance and Capitalism: Beneath the Surface of the Financial Industry. Susan Long and Burkard Sievers (Editors). New York: Routledge, 2012. Walker, R., Walker, R. (2017). Scandal at Socit Gnrale: Rogue Trader or Willing Accomplice?. Kellogg School of Management Cases, 1-8.

No comments:

Post a Comment

Note: Only a member of this blog may post a comment.