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FRM Part I · FRM Exam Part I · Learning From Financial Disasters

In the Barings Bank collapse of 1995, Nick Leeson was able to conceal large losses in a hidden account (account 88888) largely because of which control failure?

The key failure was lack of segregation of duties: Leeson ran both trading and back-office settlement in Singapore. This let him falsify records and hide losses in account 88888 without independent verification, while head office failed to challenge the unusually high reported profits and funding requests.

  1. ALeeson headed both the front-office trading and back-office settlement functions in Singapore, so there was no segregation of dutiesCorrect
  2. BBarings had no capital allocated to its Singapore subsidiary
  3. CSIMEX prohibited reporting of positions to parent firms
  4. DLeeson traded only OTC derivatives that were not subject to any margin calls

Explanation

Leeson controlled both trading and settlement operations, so he could falsify records and hide losses. The other options are not the key failure: Barings funded margin calls heavily, and the positions were exchange-traded futures and options on SIMEX and Osaka.

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