REPORT OF THE INSPECTORS OF BARING FUTURES (SINGAPORE) PTE LTD

EXECUTIVE SUMMARY

1. Baring Futures (Singapore) Pte Ltd ("BFS") was incorporated on 17 September 1986 and shortly after, applied for and was granted non-clearing membership by the Singapore International Monetary Exchange Ltd ("SIMEX"). On 21 February 1992, BFS applied for clearing membership of SIMEX and this was subsequently granted. BFS commenced trading on SIMEX on 1 July 1992.

2. Mr Nicholas Leeson joined Baring Securities Limited ("BSL") in 1989. Initially, he worked primarily in the settlements department. In early 1992, Mr Leeson applied for registration as a dealer with the Securities and Futures Authority ("SFA") in England. The SFA discovered in the application that Mr Leeson had made a false statement that there were no unsatisfied judgment debts against him. The SFA queried BSL on the false statement and BSL eventually withdrew the application to the SFA.

3. In April 1992, Mr Leeson was posted by BSL to BFS to establish the settlement operations of BFS. Notwithstanding his difficulties with the SFA, it was decided from the outset that Mr Leeson would also be involved in trading at BFS, as its floor manager at SIMEX. The fact that the SFA had demanded an explanation from BSL for Mr Leeson's false statement to them, and that Mr Leeson's application to the SFA had later been withdrawn, were never communicated to SIMEX. In his application to SIMEX, Mr Leeson similarly made a false statement that no judgment in civil proceedings had ever been entered against him.

4. In 1992, it was envisaged that Mr Leeson's trading role at BFS would be limited to the execution of orders placed by Baring Group companies elsewhere on behalf of external clients on SIMEX (referred to herein as "agency business"). His role changed over time. By the third quarter of 1993, Mr Leeson was trading on behalf of the Baring Group (referred to herein as "proprietary trading"). In the course of 1994, it was well known within the Baring Group that proprietary trading had become a very important part of his business activities. By the end of 1994, Mr Leeson was thought to be one of the major contributors to the profits of the Baring Group (1) As a proprietary trader, Mr Leeson's principal activity was to arbitrage or to take advantage of differences between the prices quoted for identical contracts on SIMEX on the one hand and on the Tokyo Stock Exchange ("TSE") or the Osaka Securities Exchange ("OSE") on the other. Typically, this was achieved by entering into matching (or hedged) purchase and sale contracts on two exchanges almost simultaneously to capture favourable price differences. Mr Leeson was given certain intra-day risk limits by BSL, within which he was permitted to maintain unhedged positions. (2) He was not permitted to maintain any overnight unhedged positions.

5. On 3 July 1992, almost immediately after BFS commenced trading on SIMEX as a clearing member, Mr Leeson opened a trading account which he named account 88888. This account is the subject matter of some controversy. The management of the Baring Group have claimed that they were unaware of its existence, and that the transactions booked in the account were not authorised.

6. The transactions that were booked in account 88888 included some which had initially been transacted through other Baring Group accounts and were later transferred into account 88888, and some which had been booked directly in account 88888. The transactions booked in account 88888 (3) by Mr Leeson were distinguished by three features:

(i) the size of the positions was large from the outset and grew quickly. By the time of the collapse, the positions had grown enormously; (4)

(ii) the transactions were not hedged by matching positions. As a result, the Baring Group was exposed to enormous potential losses from even small market movements; and

(iii) the transactions consistently reflected losses from the time the account was opened. Where transactions were transferred from other Baring Group accounts into account 88888, this was often done in a way which artificially generated a profit for these other accounts to the detriment of account 88888.

7. By the end of September 1992, the cumulative losses on account 88888 amounted to ¥658 million (S$8.8 million). This rose to ¥879 million (S$12.9 million) by 31 October 1993 and further to ¥4.4 billion (S$65.7 million) by 30 November 1993. The cumulative losses continued to mount through 1994. By 31 December 1994, they stood at ¥25.5 billion (S$373.9 million) and after the collapse of the Baring Group, amounted to ¥135.5 billion (S$2.2 billion), (5) of which S$2.1 billion (6) was funded by other Baring Group companies and S$100 million by creditor banks.

8. Mr Leeson needed funds to finance the losses and margin deposits that had to be placed with SIMEX in respect of the transactions booked in account 88888. The funds came from other Baring Group companies. (7) Despite this, Barings management have consistently contended that account 88888 was an unauthorised account that they had no knowledge of. This raises the question of how Mr Leeson had obtained S$1.7 billion from the Baring Group without accounting for it. Several explanations were offered to us by employees of the Baring Group.

9. The Baring Group as a whole was undergoing an organisational restructuring with the creation of the Baring Investment Bank Group ("BIB"), which was to be an integrated structure to conduct both the banking and securities businesses of the Baring Group. Further, although in theory, the Baring Group functioned on a matrix management structure, with Mr Leeson reporting both to his local managers in BFS and his product managers in London, this did not work in practice. Mr Leeson's local managers viewed BFS as Mr Leeson's own responsibility and thus did not check Mr Leeson's activities. On the other hand, the Baring Group management in London (8) maintained that BFS was a Singapore company accountable in the first instance to its local managers. They pointed to the 1994 internal audit report which identified Mr Leeson's control of both the front and the back offices of BFS as a problem, and stated that the local managers of BFS had agreed to rectify the situation by assuming control of Mr Leeson's back office activities. This was never implemented by local management. In our view, these problems reflected the unsatisfactory way in which the persons to whom Mr Leeson reported implemented the matrix management structure, rather than any inherent shortcomings of such a structure.

10. The Baring Group's risk positions, trading limits and trading performance and the allocation of funding were monitored each day by a high-level Asset & Liability Committee ("ALCO"). (9) The vast sums of money remitted to BFS, which exceeded the total value of the Baring Group's assets, should have attracted close scrutiny by ALCO. ALCO discussed the issue of funding BFS on at least six occasions in January and February 1995. By this time Mr Leeson's reported trading activities had assumed very large proportions, causing the Baring Group to almost miss a SIMEX margin call on 24 January 1995. However the preoccupation of these meetings was to arrange adequate funding lines to meet Mr Leeson's large requirements, rather than to investigate the causes underlying these requirements. At some stage, ALCO did decide that Mr Leeson should be asked to reduce his positions, but this decision was never effectively implemented.

11. On 20 February 1995, just days before the collapse of the Baring Group, the need to reduce Mr Leeson's positions was again raised at ALCO. Mr Norris, the Chief Executive Officer of the Baring Group, informed ALCO that he had discussed this issue with Mr Leeson when they met in Singapore the previous week. Mr Norris informed ALCO that Mr Leeson had suggested that his positions should not be reduced and Mr Norris concurred with this. Mr Norris denied having had such a discussion with Mr Leeson (10) or having briefed ALCO in this way, but both facts were corroborated by independent witnesses.

12. The Financial Controls Department also apparently did not discover the existence of account 88888 although it might have been expected to do so. This is partly attributable to the limited view that Group Finance Director, Mr Broadhurst, took of the role of Financial Controls. Mr Broadhurst explained that as far as he was concerned, Financial Controls was responsible for furnishing to management, specific information such as the daily reports of profits and losses in respect of the various activities of the Baring Group. However, Financial Controls never had an accurate idea of the true profits and losses of the Baring Group. With particular reference to BFS, Financial Controls never properly tracked the cost of funding of the Baring Group's trades executed by Mr Leeson. When it tried in the last quarter of 1994 to determine the funding costs, Financial Controls found this to be a complex exercise (11) which it never successfully completed.

13. Some of the funds used by Mr Leeson to finance the transactions booked in account 88888 were requested from BSL ostensibly to fund client positions. These funds were recognised by BSL as "loans to clients". In these circumstances, Credit Control would have been expected to take steps to verify the identities and creditworthiness of the "clients" receiving these loans. Any such attempt would have revealed that there were no such "clients". However, no such attempt was made. Credit Control explained that this was because it was never informed by Settlements or Group Treasury that large remittances had been made to BFS on account of "loans to clients".

14. Mr Leeson's product managers accepted the reports of his considerable profitability with admiration rather than scepticism. They perceived no irregularity in Mr Leeson's trading activities despite the inherent limit to the profit potential of Mr Leeson's arbitrage activities. This was because the price differences that were arbitraged were small, and large volumes had to be transacted in order to realise meaningful gains. However, as the volume of such transactions increased, this tended to reduce the price differences, and therefore the potential profit from arbitrage.

15. The margins placed with SIMEX by BFS in respect of the house positions (12) were subject to the reporting requirements and maximum exposure limit under the Large Exposures Directive and Notices issued by the Bank of England. Mr Leeson had been submitting inaccurate reports of house and client positions to BSL, which understated the large exposures of the Baring Group to SIMEX. Mr Leeson's reports were only regularised at the end of January 1995. Nevertheless, the exposures to the Exchange that were reported were still very large.

16. The large exposures report submitted by the Baring Group to the Bank of England for the quarter ended 31 December 1994 although inaccurate, showed that the maximum exposure in respect of margins deposited by the Baring Group with SIMEX, OSE and TSE during that quarter, each exceeded the 25% large exposures limit. (13) This did not evoke a strong reaction from either the Bank of England or the Baring Group's senior management although the maximum aggregate exposures during the quarter exceeded 75% of the Baring Group's capital funds. Perhaps this was because both the Bank of England and the Baring Group's senior management had been uncertain for about two years whether margins deposited with each of the exchanges for house positions were in fact, subject to the 25% large exposures limit. The Bank of England finally notified the Baring Group on 1 February 1995 that margin deposits were subject to these limits. However, because it had not raised any objection when the Baring Group's exposures had previously exceeded the 25% limit, the Bank of England allowed the Baring Group time to bring such exposures within the limit.

17. The Baring Group's management proffered many explanations as to how account 88888 purportedly escaped detection. However, we do not accept their contention that account 88888 was an unauthorised account that they had no knowledge of. In our view, the Baring Group's management either knew or should have known about the existence of account 88888 and of the losses incurred from transactions booked in this account. This is because of the following facts:

(i) BSL had remitted very large sums of money to BFS over time. BFS had only four clients, three of which were other Barings entities. The largest of these was BSL. BFS had no funding lines which it could operate at its own discretion except for the Citibank daylight margin facility. Its activities were funded almost entirely by its clients, in particular BSL and the other Baring Group companies. In those circumstances, the entities which remitted funds to BFS, should have been reconciling the funds that they remitted with the trades for which the funds had been requested. Had they done this, Mr Leeson could not have undertaken any activity unknown to or unauthorised by the other Baring Group companies. As such a reconciliation was not undertaken, the question arises why not, since this meant that very large sums of money were remitted to BFS without requiring BFS to justify its requests for funds;

(ii) BSL accepted that as ever increasing funds were remitted to BFS, BSL found it more and more difficult to reconcile these amounts with the trades for which the funds were being requested. During 1993, BSL knew that between £15 million (S$35 million) and £20 million (S$46 million) remitted to the Baring Group's broking companies in the Far East could not be reconciled with the trades in respect of which the funds had been requested. In 1994, this unreconciled amount increased more than five-fold to about £100 million (S$230 million) and during that year, the source of the problem was identified as BFS. In the first two months of 1995, the unreconciled amount had grown to about £320 million (S$736 million). Group Treasury thought that there could be several explanations, including short term funding requirements to meet intra-day advance margin calls by SIMEX; and advances to fund the positions of Baring Securities (Japan) Limited ("BSJ"), because BSJ purportedly took a longer time to raise the necessary funds than did BSL. However, any such explanation would only have accounted for extremely short term funding, and not the large and persistent unreconciled balance of about £100 million (S$230 million) throughout much of the latter half of 1994;

(iii) the settlements operations of BFS were linked by computer to BSL Settlements. Mr Leeson had suppressed information pertaining to trades that were booked in account 88888 from the general trading information ("the trade feed") transmitted to BSL Settlements for most of the relevant period. But information pertaining to margin requirements ("the margin feed") for all trading accounts, including account 88888, was at all material times, transmitted and available to BSL Settlements. BSL Settlements knew, or should have known, that the margin feed constituted a complete breakdown of the margin calls that were being made by BFS on its clients. Yet BSL Settlements claimed that it never used the margin feed, a simple one page document, to resolve the unreconciled balance; and

(iv) in the third quarter of 1994, BFS was internally audited. The internal auditors had done good preparatory work before starting the audit. They had identified as one key issue to be examined further in Singapore, the fact that Mr Leeson occupied a very powerful position controlling both the front and the back offices of BFS. He was both chief trader and head of settlements and was thus in a position to record the trades that he himself had executed in any way he wished. The internal audit report, issued in the last quarter of 1994, specifically highlighted this fact as creating a significant risk that internal controls could be overridden. Nothing was done to remedy this. The internal audit report noted that insofar as Mr Leeson's trades were almost all executed for other Baring Group entities, these trades would be subject to reconciliation controls, (14) which would mitigate the extent of any irregularities that might arise from this situation. In fact, no such reconciliation controls existed. (15)

18. In these circumstances, BSL's claim that it was unaware that account 88888 existed, and also that the sum of S$1.7 billion (16) which the Baring Group had remitted to BFS, was to meet the margins required for trades transacted through this account, if true, gives rise to a strong inference that key individuals of the Baring Group's management were grossly negligent, or wilfully blind and reckless to the truth.

19. The internal audit report had not in fact uncovered new ground. The Baring Group had known from the outset that Mr Leeson had a dual role as head of the front and back offices. The internal audit report served primarily to refocus attention on this point. However, the Baring Group continued to act recklessly. Even after the internal audit report, and despite the reconciliation difficulties persisting for well over eight months, senior managers of the Baring Group did not take firm action to address the problem. Instead they remitted even more funds to BFS.

20. In the third quarter of 1994, Group Treasury proposed that a person to be designated the Asian Regional Treasurer, should be posted to either Singapore or Hong Kong. The main responsibilities of the Asian Regional Treasurer would have included co-ordinating and resolving of all problems relating to funding in the region and supervising of major cash flows in the region, especially the funds remitted to BFS. Mr Norris, the Group Chief Executive Officer, resisted this on grounds of costs. Similarly, a proposal by the Financial Products Group ("FPG") in September 1994, to dedicate a "middle-office" person to the task of properly recording and reporting trades was never properly implemented.

21. In January 1995, SIMEX queried BFS on the size of the Baring Group's positions on the Exchange. On 11 January 1995, SIMEX wrote to BFS specifically questioning some irregularities in the margining of account 88888. Subsequently, on 25 January 1995, SIMEX questioned BFS on the adequacy of its financial resources to meet potential losses and margin calls given the size of the Baring Group's positions on the Exchange. The response to the first letter on margining discrepancies was signed by Mr Jones, the Finance Director of BFS. According to Mr Jones, he had no real knowledge of the contents of the letter, which had been drafted by Mr Leeson. The Baring Group management in London claim they never saw this letter. As to the second letter from SIMEX, BFS replied on 10 February 1995, assuring SIMEX not only of the adequacy of funds to support the positions maintained with SIMEX, but also making it clear that the Baring Group managed its positions on a global basis, and that it monitored and actively managed risks of all kinds daily in London. The letter also stated, in effect, that the entire assets of the Baring Group were available to enable BFS to meet its financial obligations to SIMEX. This letter, although sent by BFS, was drafted by Mr Hawes, the Group Treasurer and approved by ALCO.

22. By the date of the letter of 10 February 1995, at least some members of ALCO were aware that the funds requested by Mr Leeson in respect of client positions could not be reconciled with the funds BSL collected from its clients, and that the remittances to BFS were therefore not fully understood; that Mr Leeson's trading positions had already caused funding pressure which almost resulted in the Baring Group missing a margin call; and that Mr Leeson had not reduced his positions contrary to the instructions of ALCO.

23. Yet, ALCO made no effort to understand fully the position and the basis for the assurances it gave to SIMEX. Had ALCO taken any such step, it might well have curtailed the flow of funds to BFS. This would have deprived Mr Leeson of the funds he needed to place as margins with SIMEX, prevented him from continuing to trade in the way he did, and possibly averted the collapse of the Baring Group. Instead, in the three weeks up to 24 February 1995, Baring Group companies remitted to BFS a further S$1 billion.

24. It is tempting to suggest with the benefit of hindsight that SIMEX placed undue reliance on the Barings name and the assurances given in that name. However, given the tone of BFS's letter of 10 February 1995, it is difficult to imagine circumstances in which such assurances given by any reputable merchant bank would not have been accepted.

25. Also in January 1995, while conducting the annual audit of BFS's financial statements for the year ended 31 December 1994, BFS's external auditors, Coopers & Lybrand Singapore ("C&L Singapore"), discovered a discrepancy of ¥7.7 billion (S$115 million) between the SIMEX Yen settlement variation account in the general ledger and the balance for the same account as shown on the SIMEX statements. The auditors initially could not obtain a satisfactory explanation from Mr Leeson for this discrepancy.

26. After several attempts to resolve the situation, Mr Leeson told the auditors that this discrepancy represented a receivable due to BFS from Spear, Leeds & Kellogg ("SLK"). (17) Mr Leeson claimed that this receivable (hereafter referred to as "the SLK Receivable") arose from a transaction between BSL and SLK that had been brokered by BFS. C&L Singapore communicated this to Coopers & Lybrand London ("C&L London"), the Baring Group's external auditors, at the end of January 1995. C&L London informed the Group Finance Director, Mr Broadhurst, of this explanation. As BSL had no record of having entered into any such transaction, Mr Broadhurst was concerned and requested Mr Hawes to seek clarification from Mr Leeson.

27. After receiving a query from Mr Hawes, Mr Leeson told Mr Jones, BFS's Finance Director, that the balance had in fact arisen from a transaction that he had brokered between SLK and Banque Nationale de Paris ("BNP") (18) without any authorisation from his superiors and that BFS had paid BNP a sum of about ¥7.7 billion (S$115 million) two months earlier. Meanwhile, Mr Broadhurst had informed various persons in London, including Mr Norris, that the external auditors of BFS had uncovered a large receivable, and that Mr Leeson's explanation could not be verified. Mr Norris was also told by Mr Bax, the Managing Director of BFS, that Mr Leeson had informed Mr Jones that the receivable arose from an unauthorised transaction. Within the next few days, at least six different versions of how the receivable had arisen, circulated among Barings senior management. A number of the senior managers who were told three or four different versions (19) now claim that it had never occurred to them that such explanations could have been fabricated and untrue, or that they felt any discomfort about these differences.

28. It is clear that the version that Mr Broadhurst and Mr Bax first communicated to Mr Norris, i.e. that Mr Leeson had undertaken an unauthorised transaction, caused concern. Mr Norris, however, downplayed the significance of the matter and discouraged all independent investigations, including by the external auditors, into the alleged transaction and the circumstances in which BFS had supposedly paid such a large sum in respect of this transaction. Mr Norris also took steps to conceal this matter from the other Baring Group directors and to discourage C&L Singapore and C&L London from including the matter in their audit management letters.

29. Mr Norris initially instructed Mr Broadhurst not to inform ALCO about the discrepancy. When the matter was eventually raised at the ALCO meeting on 8 February 1995, Mr Norris presented the matter as an operational or posting error and directed that the discussion not be minuted in any detail. None of the senior managers of the Baring Group at any stage, asked how and from where Mr Leeson had obtained ¥7.7 billion (S$115 million) to make such an unauthorised payment.

30. In fact, there was no receivable due from SLK at all. The discrepancy represented part of the funds remitted by the other Baring Group companies to BFS that Mr Leeson had used to finance the losses and margin calls in respect of transactions booked in account 88888. This was not uncovered because of Mr Norris's efforts to downplay its significance and divert attention from the discrepancy. Further, Mr Norris took no action against Mr Leeson for his supposed unauthorised action, which according to Mr Broadhurst, had been a "sackable offence". Instead Mr Leeson was to receive a sizeable bonus for 1994. Also, Mr Norris failed to investigate whether Mr Leeson had undertaken any other unauthorised transactions and instead allowed Mr Leeson to increase the size of the positions he managed.

31. In concealing the problem, Mr Norris was assisted by Mr Bax, who tried to divert investigations by the external auditors and Mr Hawes, the Group Treasurer, into the alleged transaction in Singapore. Mr Bax had encouraged Mr Leeson to present the external auditors with a confirmation from BSL, signed by Mr Baker, Head of FPG, stating that BSL had authorised the transaction with SLK, even though he knew that the contents were false. When Mr Bax later spoke to Mr Baker in the first week of February 1995, Mr Bax did not specify details of the purported transaction to Mr Baker. As it transpired, Mr Baker was not even aware that any such confirmation had been sought; he had not given such a confirmation; and Mr Leeson had presented the external auditors with a forged confirmation.

32. Both Mr Norris and Mr Bax have denied being involved in any plan either to underplay the significance of the discrepancy or to discourage independent investigations into the matter. However, we are unable to accept their denials. (20)

33. When the testimony of the other witnesses was put to Mr Norris, he denied the substance of their testimony and argued that no motive could be advanced to explain why he acted in the way which had been suggested to him. A plausible motive can readily be conjectured. Mr Norris had assumed leadership of the Baring Group after his predecessor had left BSL when it incurred losses of £11 million (S$25 million). In those circumstances, Mr Norris clearly had an interest in concealing the much larger losses that the Baring Group had incurred via account 88888 in the course of the three years that Mr Leeson had been in Singapore.

34. It must be stated that the question of motive remains conjectural as does the question of why Mr Leeson had set up account 88888 in the first instance so soon after he arrived in Singapore. However, any explanation must account for the following undisputed facts:

(i) Mr Leeson was a 25-year old settlements officer with no trading experience when he first came to Singapore in April 1992;

(ii) by early July 1992, Mr Leeson had opened account 88888 and booked a large volume of transactions in this account;

(iii) Mr Leeson contrived a series of measures to conceal the true nature of the account from the external auditors and supposedly from his superiors;

(iv) the net effect of these transactions was to artificially inflate the Baring Group's reported profits which was attributed to his performance;

(v) information pertaining to account 88888 and the margin calls on the account was available in London at all times; and

(vi) in spite of the growing discrepancy between the funds remitted to BFS and the transactions in respect of which the funds had been requested, other Baring Group companies continued to remit funds to BFS, and by the date of the collapse, had remitted about S$1.7 billion.

35. One week before the collapse of the Baring Group, on 17 February 1995, Mr Anthony Railton, a supervisor with BSL Settlements (21) discovered a discrepancy of ¥14 billion (S$215 million) between the amounts that had been remitted to BFS by BSL and BSJ, and amounts with BFS or which BFS had placed with SIMEX as margin deposits. Mr Railton tried in vain to resolve this discrepancy with Mr Leeson. In the meantime, Group Treasury queried why Mr Leeson was requesting further funds for margin deposits when, according to BSL Settlements, he had supposedly reduced his position. Also at this time, SIMEX served notice on Mr Leeson of its intention to charge BFS for breach of Rule 513 of the SIMEX Rules. (22) In the wake of these developments, Mr Leeson fled Singapore on the night of 23 February 1995. Between 17 February 1995 and 23 February 1995, BSL remitted to BFS a sum of S$460 million.

36. In retrospect, it seems probable that until February 1995, the Baring Group could have averted collapse by timely action. By the end of January 1995, although substantial losses had been incurred, these were only one quarter the eventual losses. In our view, if:

(i) the growing difficulty in reconciling Mr Leeson's funding requests (which had persisted as a problem concerning BFS since, at least, June 1994) had been thoroughly and promptly investigated; or

(ii) steps had been taken to overcome the inability of Group Treasury and BSL Settlements since, at least, June 1994, to understand BFS's margin calls; or

(iii) the significant risk, highlighted by the internal auditors in October 1994, that Mr Leeson could override internal controls by virtue of his command of the front and back offices, had been addressed; or

(iv) initiatives such as the Asian Regional Treasurer or the "middle office" person had been effectively implemented when they were proposed in the last quarter of 1994; or

(v) ALCO had taken Mr Leeson to task for increasing his positions, despite ALCO's instructions on 24 January 1995, and on several occasions thereafter, that he should reduce his positions; (23) or

(vi) the SLK Receivable had been fully investigated and resolved at the end of January 1995; or

(vii) ALCO had understood and effectively addressed the concerns expressed by SIMEX in its letters to BFS in January 1995, particularly as to the large positions maintained by BFS, and its ability to fund these positions; or

(viii) the reasons underlying the requests for very large amounts of funds by Mr Leeson in January and February 1995 had been analysed and understood,

the collapse could well have been averted. Hence, whether the Baring Group management in fact knew of account 88888 is hardly crucial. If they did not know of it at the outset, they would have learnt of it once they undertook any of these steps to investigate the position. They could have remained ignorant of the account up to the time of collapse only if they had persistently shut themselves from the truth. Mr Norris's explanation after the collapse, namely that the senior management of the Baring Group believed that Mr Leeson's trading activities posed little (or no) risk to the Baring Group, but yielded very good returns, is implausible and in our view, demonstrates a degree of ignorance of market reality that totally lacks credibility.

37. For three years, account 88888 purportedly escaped the notice of the entire Baring Group management. Yet within hours after the Baring Group senior management concluded that Mr Leeson had fled, BSL personnel working in London and Singapore with incomplete documentation, uncovered account 88888 and identified it as the immediate cause of the collapse.

38. BFS is now insolvent. In view of this and the matters set out more fully in this report, it is recommended that BFS be wound up pursuant to Section 254(1)(g) of the Companies Act.

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Notes:

1 This was reflected in Mr Leeson's substantial remuneration in 1994. For his performance in 1993, Mr Leeson received a bonus of £115,000. For 1994, Mr Leeson was to have received a bonus of £450,000.

2 There were no gross limits on the volume of arbitrage transactions that could be entered into by Mr Leeson.

3 This refers to transactions directly booked in account 88888 as well as those transferred from other accounts.

4 The size of the positions booked in account 88888 was so large that when market prices moved unfavourably, it caused the collapse of the Baring Group.

5 The conversion rates used in this paragraph are the rates prevailing at the relevant time as set out in Appendix 3K.

6 This comprised a sum of S$1.7 billion remitted by other Baring Group companies to BFS and a sum of S$400 million which was paid by SIMEX to BFS in respect of trades transacted for other Baring Group companies being marked to market, but which had not been remitted by BFS to these other companies. It is not known where these other companies obtained the funds from.

7 Until early 1994, BFS transacted both house and client trades on behalf of BSL. From early 1994, house trades were no longer transacted on behalf of BSL. Instead, they were transacted on behalf of another entity, Baring Securities London Ltd ("BSLL"). References to BSL should therefore be understood to include BSLL in relation to house trades transacted from early 1994. In addition, BFS transacted house trades on behalf of Baring Securities (Japan) Ltd ("BSJ"). Client trades executed at the request of the agency sales team based in Japan were booked in BSL client accounts.

8 As well as Mr Killian to whom Mr Leeson reported in respect of agency business.

9 The members of ALCO included Mr Norris, the Group Chief Executive Officer; Mr Maclean, Head of the Banking Group; Mr Barnett, the Group Chief Operating Officer; Mr Hopkins, Director of Group Treasury and Risk; Mr Baker, Head of the Financial Products Group; Mr Broadhurst, Group Finance Director; and Mr Hawes, the Group Treasurer.

10 A number of witnesses gave evidence that Mr Norris had a 60- to 90- minute meeting in private with Mr Leeson, in Singapore on 16 February 1995. Mr Norris denied this and maintained that he had a very short conversation (3 to 5 minutes) with Mr Leeson that day.

11 We do not understand why this should have been so as information on the amount of funds raised by BSL to fund Mr Leeson's activities was or should have been available at all times.

12 i.e. proprietary trading including the transactions booked in account 88888.

13 The applicable limit was 25% of the capital base of the Baring Group. This report showed that in the aggregate, sums exceeding 75% of the Baring Group's capital base had been deposited with SIMEX, OSE and TSE.

14 This is the reconciliation referred to in paragraph 17(i) above.

15 The internal auditors had also initially recommended that a separate (and important) reconciliation be undertaken between the margins called by SIMEX from BFS, and the margins called by BFS from the other Baring Group companies, in particular BSL and BSJ. This was later omitted from the final version of the report at the insistence of Mr Leeson. Mr Broadhurst and the internal auditors gave in to Mr Leeson. No convincing explanation has been put to us for this decision. Further, this issue underscores the fact that Mr Broadhurst, a key Baring Group manager who was in charge of Financial Controls, was aware that a reconciliation of this sort was not being undertaken at all. The details are at Chapter 5 below.

16 See note 6 above. This excludes the sum of S$400 million left with BFS and not remitted to other Baring Group companies.

17 An American securities broking firm.

18 BNP Securities (Japan) Ltd was the only direct external client of BFS, but it accounted for less than 1% of BFS's trading volume.

19 The various different versions and the persons who were aware of these versions are set out in Chapter 16.

20 Our reasons are fully set out in Chapter 16 below.

21 Mr Railton was temporarily seconded to BFS for a short period to improve the flow of information on margin calls and funding requests from BFS.

22 Rule 513 provides inter alia that an offer made on the trading floor must be open for acceptance by any trader and should not be designated for acceptance by any particular trader.

23 In fact the size of the Nikkei futures positions on SIMEX, that was managed by Mr Leeson, increased from about 6,000 contracts on 24 January 1995 to about 33,000 contracts on 26 January 1995.