The Nikkei 225 and JGB futures contracts traded by Leeson were the simplest of derivative instruments. They were also the most transparent - since they were listed contracts, Leeson was required to pay (or receive) daily margins and so needed funds from London. In January and February 1995 alone, he asked for US$835 million. His could not hide his build-up of positions on the OSE because the exchange publishes weekly numbers. All his rivals could see his enormous positions, and many assumed that the positions were hedged because such naked positions were out of all proportion to the firm's capital base or even those of other players.
His senior managers also assumed Leeson's were hedged. But unlike outsiders who had to assume that these positions were hedged, Barings' management did not. They could have done something about it - they could have probed Leeson, they could have tried to obtain more information from their internal information systems, and most of all they could have heeded the warning signals available in late 1994 and throughout January and February of 1995.
But although Barings fate was only sealed in the final weeks of February, the seeds of its destruction were sown when senior management entered new businesses without ensuring adequate support and control systems. The collapse of Britain's oldest merchant bank was an extreme example of operations risk, i.e. the risk that deficiencies in information systems or internal controls result in unexpected loss. Will it happen again? Certainly, if senior managers of firms continue to disregard rules and recommendations which have been drawn up to ensure prudent risk-taking.
