|
|
|
|
(d) Poor control procedures
(iv) No limits
|
Barings did not impose any gross position limits on Leeson's proprietary trading activities because it felt that there was little market risk attached to arbitrage trades since at the close of business, the position must be flat. But the Barings collapse has shown that placing gross position limits on each side of an arbitrage book is perhaps not such a bad idea after all. While it is true that an arbitrage book has little price (directional ) risk, it has basis and settlement risk. The former arises because prices in two markets do not always move in tandem and the latter because different markets have different settlement systems, creating liquidity and funding risk.
|
Case Studies *
Not Just One Man - Barings *
II. Lessons from Leeson *
(d) Poor control procedures
|
