Barings Bank, PLC, was a British merchant bank founded in 1763 and known as the “Queen’s Bank.” The bank was one of the world’s most highly regarded financial institutions before it suddenly collapsed due to the actions of a 28-year-old rogue trader, Nick Leeson, operating from the bank’s Singapore affiliate. The sad tale of Barings highlights the need for financial institutions to adopt strict internal control procedures to monitor the positions established by traders on behalf of the institutions.

Leeson was supposed to be conducting stock index arbitrage between Japanese stock index futures contracts traded in Japan and similar futures contracts traded on the Singapore exchange (SIMEX). Such trading involves buying the cheaper contract and simultaneously selling the more expensive one, then reversing the trade when ...

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