Trading & Options · Profile from Trading and Options Research Companion
Barings and Nick Leeson
The London merchant bank founded in 1762 that was brought down in February 1995 by one 28-year-old trader in Singapore. Nick Leeson ran Barings Futures (Singapore) (BFS), which began trading on the Singapore International Monetary Exchange (SIMEX) on 1 Jul 1992; two days later he opened account 88888, an "error account" he used for unauthorised positions and had excluded from reports to London (Singapore inspectors' report via Brown–Steenbeek 2001). London believed he ran a near-riskless arbitrage of Nikkei 225 futures between Singapore and Osaka. In fact he held large long Nikkei futures, short Japanese government bond (JGB) futures and a "short volatility" position in Nikkei options — the short straddles of this knowledge base's Short Strangle and Straddle system, sold without limits or anyone watching (Bank of England Board of Banking Supervision report, 18 Jul 1995, as summarised by the Reserve Bank of Australia). After the Kobe earthquake of 17 Jan 1995 the Nikkei fell, Leeson doubled his futures position, and Barings could not meet SIMEX margin calls on 23 Feb 1995. Administrators were appointed on 26 Feb 1995. Cumulative unreported losses were £827m by 27 Feb 1995 and £927m including the cost of closing the positions — against Group capital of about £350m at end-1994 (BoBS via RBA). ING bought Barings for £1 and injected £660m, taking control on 6 Mar 1995 (AP, 7 Mar 1995). For a trading book Barings is the purest case of the edge equation's survival factor set to zero by an unhedged short-volatility book plus missing controls: a claimed arbitrage edge that did not exist, a doubling strategy hidden in an error account, and a head office that kept sending cash.
At a glance
- Founded
- Barings: 1762, London (ING's Baring Archive dates; the BoBS called it a "presence in merchant banking of over 230 years" — RBA). BFS: SIMEX member trading from 1 Jul 1992 (Brown–Steenbeek 2001, citing the Singapore report, SR 3.1)
- Headquarters
- Barings plc: London. BFS: Singapore; trading on SIMEX and, through Barings Securities Japan, in Osaka
- Ownership / structure
- Barings plc, a private merchant bank (largely owned by a charitable foundation — from memory, verify); Barings Group included Baring Brothers & Co (banking), Baring Securities and Baring Asset Management; BFS was a subsidiary of Baring Securities. In administration 26 Feb 1995; acquired by ING for £1 (control 6 Mar 1995)
- Type
- Bank trading desk / blow-up; this profile is a single-event entity with six moves (rule 6)
- The trader
- Nick Leeson, aged 28 at the collapse (FIA, 2020; AP, Oct 1995); general manager and head trader of BFS, in charge of both trading and settlements (BoBS; Singapore report)
- Scale (dated)
- Unrecognised losses of £185m in 1994 and over £200m cumulative at end-Dec 1994, while Barings' draft 1994 accounts showed a pre-tax profit of £102m after an equal transfer to a bonus pool; Group capital ~£350m end-1994; funding to BFS just before the collapse was twice Group capital; cumulative losses £827m (27 Feb 1995) and £927m with close-out costs (BoBS via RBA). In US dollars: ~$1.3bn (FIA, 2020) or US$1.4bn (Brown–Steenbeek 2001) — conversions differ by date
- Positions (Feb 1995)
- Long Nikkei futures equal to 49% of open interest in the March 1995 SIMEX contract and 24% of the June contract (BoBS §4.25); short JGB futures of over 28,000 contracts; Euroyen futures loss only ~£3m (BoBS §4.43) (all via Brown–Steenbeek 2001)
- Regulators
- Bank of England (Barings' UK supervisor); the Securities and Futures Authority (Baring Securities, from memory, verify); in Singapore the Monetary Authority of Singapore, the Ministry of Finance and SIMEX; Osaka Securities Exchange
- Moves in this profile
- Six — the US KB's equivalents are Knight Capital (one morning's operational failure) and Long-Term Capital Management (disclosed risk, rescued). Barings had no US-style rescue: it failed
- Signature moves (incl. failures)
- The Singapore posting and account 88888 (1992); the "switching" arbitrage and London's funding (1993–94); short Nikkei straddles (1994); Kobe and doubling down (Jan–Feb 1995); collapse and the ING rescue (Feb–Mar 1995); the inquiries, the trial and the regulatory legacy (1995–99)
6 strategic moves analysed
Each one gets a full strategy file in the companion: context, the decision, the financing, what happened, and the lesson.
1992
Singapore Posting and Account 88888
Rogue trade or control failure — the set-up: one person given trading and settlement
1993
Switching Arbitrage and London Funding
Rogue trade or control failure / funding decision — head office funds a "riskless" arbitrage without limits
1994
Short Nikkei Straddles
Large trade or position — unhedged short volatility, unauthorised
1995
Collapse Administration and ING Rescue
Restructuring, bailout or liquidation — failed central-bank-convened rescue, administration, sale for £1
1995
Inquiries Trial and Regulatory Legacy
Regulatory, enforcement or legal action
1995
Kobe Earthquake and Doubling Down
Loss, drawdown or blow-up response — doubling the position