A rogue trader is a market professional who is basically involved in different unauthorized trading activities. Most people are highly familiar with the rogue trading activities, as there have been several instances of huge losses incurred under the rogue trading. Recently these rogue trading activities causing huge losses attracted the media and many films have been based on such rogue trading activities. The rogue trader movie has been highly famous as it portrayed the character of a rogue trader in Baring Bank named Nicholas Leeson. The career path of Leeson followed an upwardly moving curve from his job of back office trading settlement to a highly acclaimed trader earning huge bonuses. Moreover because of the high popularity of Leeson, the Bank allowed him to make his own trade settlement, which is highly unauthorized and risky in terms that the risk limit of loss is violated and the bank, has to pay margin money on a continuous basis to make up for the loss involved. Moreover the negligence of the Barings Bank management and huge dependence on Leeson caused the bank a huge loss of $1.7 billion (Krawiec, 23-26; Rogue Trader). Evaluation of Barings’ internal control mechanism
Internal Control mechanism of Barings’ bank and its tone at the top: The internal control mechanism of the Barings bank was completely inefficient. It could be viewed by the fact that the Government body of the organization did not set any fixed limit for the position taking like position in intraday, in overnight position. Moreover the salary of the top management official were linked excessively to the speculated profit which promoted the top management official under the guidance of Leeson to take excessive position in derivative trades even risking the loss limits when led to huge losses incurred. Moreover the absence of any formal internal audit system allowed the bank to take unauthorized path of settling the huge loss in the error account (Rogue Trader). Thus there is a complete setback in the ethical standards of the bank, as the bank was more tied to the greed of the top officials putting on a huge risk for the bank as well as for its customers. Risk Assessment:
The risk assessment mechanism of the bank was highly inefficient. The movie Rogue Trader shows that there was no proper outline of the risk assessment mechanism in the Barings bank. The top officials did not set any limit about the risk tolerance level of the bank. Moreover positions taken by the officials in risky derivative trading under Leeson and drainage of money for making up for the margin calls promoted huge financial losses. Without proper internal audit system in place the reported loss was even accounted for and the system followed was completely illegal. There was also proper discussion between the Board and the management regarding the implementation of a risk management mechanism in the Bank. (Rogue Trader, Srinivasan, 85-86) Control Activities:
The risk control mechanism is highly important in case of banks as it deals with the money of the common people who are also at risk. Banks should immediately address the cause of the risk. The major risk involved for Barings bank involves its investment in the risky derivative instruments that cause huge losses. So the bank should have definite control mechanism in place allowing the limit of exposure in the instruments. Proper audit procedures should be place assessing the amount of loss, which can help in taking proper actions to control the loss. The IT system should be made much efficient coupled with risk assessment software systems which can calculate the exposure to risk for the Bank as denoted by the Value at Risk or VAR which calculates the maximum possible risk and the probability for it to occur. There should be a supervisory bank rating system under the parameter C-A-M-E-L-S covering capital adequacy, Asset quality, Liquidity and Sensitivity to market risk. (Greuning &...
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