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Case Study Of Nick Leeson Derivative Broker

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Question:

Discuss about the Case Study of Nick Leeson Derivative Broker.
 
 

Answer:

Introduction to Nick Leeson

Nicholas William Leeson or also known as Nick Leeson is a very famous derivative broker who was responsible collapse of Barings Bank. He was the one who was involved in fraudulent and unauthorized speculative trading. Barings bank was one of the oldest Merchant Bank in United Kingdom and its failure is a very big case study. Currently after serving his prison term, he is involved as eLearning trainer who is involved in mentoring new traders in financial markets (Hunt, 1996).

What all Nick Lesson did wrong

In the year 1992, he was appointed as the general manager of the operation line in Singapore market specifically in futures segment. This line was not active but was available with Barings Bank. It only started working in the year when Leeson joined the firm. Companies should systematically explore their markets to ensure early warning of the most significant threats. They should identify the processes that are threatened and determine the variables they most need to monitor. Many enterprise organizations, after decades of rapidly integrating technologies under fire, find themselves with a fragmented fraud prevention system that has been patched together and is not only costly and inefficient, but may actually hamper larger organizational efforts to improve data management and application architecture. Continuing to address fraud prevention strategy and design during crisis situations perpetuates a cycle of incomplete and ineffective integrations, thereby increasing the likelihood of future crises and rushed solutions. Additionally, a well-designed and contemplated fraud prevention strategy that integrates fully into customer interaction platforms and business intelligence tools can provide meaningful insights to the business related to end customers, risk levels of product lines, marketing efforts and new business channels.

 

What all happened while the closure of the company

The last few years have seen many companies embarrassed, and sometimes reduced to bankruptcy, by unpleasant surprises. Most of them already had the information needed to foresee these surprises and to reduce the damage they caused. In his book "Heads Up," Ken McGee recommends that companies institute a formal process to identify the causes of possible problems to determine the ways in which surprises might arise in their industries. It's often useful to have a list of possible threat processes, as a stimulus and reference guide. Here, we set out a list of these processes, with real examples, and identify the actions that companies should take.

There are four main areas in which threats may appear — among customers, markets, processes and suppliers. Of course, there are crossovers. For example, internal problems may produce poor service and contribute to customer alienation.

Customer Alienation and Market Changes to protect from Fraud

Customers may become alienated by:

  • Fashion shifts
  • Changes in buying criteria
  • Loss of reputation

Changes in laws or regulations, a new kind of competitor or shifts in discretionary spending can change the whole nature of the market. Customers remain willing to buy your products but need them less. For example, cinema screens last longer in non-smoking cinemas. Barnes and Noble's share price slumped after the appearance of Amazon. Cisco's sales slumped after the bursting of the Internet bubble put lots of nearly new Cisco equipment on the secondhand market. In many markets, sales of mobile phone top-up cards have reduced sales of confectionery.

Spotting the problem in advance

Companies should get timely notice of cultural changes by market research and customer surveys. Keep an eye on research into changes in customer preferences. Watch relevant specialist and popular news channels and ensure that staff in contact with the market are easily able to pass on their knowledge to management.

Investigate anomalous customer behavior in case it reveals unrecognized shifts and prepare to act on your discoveries by creating and practicing crisis management plans. Identify how poor service, product faults or public criticism on environmental or ethical grounds could harm your reputation, and plan ways to minimize the damage. The selection of a fraud prevention provider is sometimes made in a silo, bringing in additional stakeholders only when a new integration is near completion, or requesting participation at an executive level but not including the relevant midlevel subject matter experts as part of the working team. As with any siloed technology or architectural decision, this can result in the discovery of key use cases and gaps in services too late to address without loss of time and money. When the decision is related to fraud prevention, the impacts can be even greater than with many other technology decisions, as a siloed approach may result in negative customer experiences, negative impact on revenue and marketing partners, and disruption to the transaction flow and audit trail for financial reconciliation.

IT can contribute by providing Web-based surveys, tracking trends through monitoring of searches on major Internet portals like Google, and collecting and analyzing usage data from digitally enabled products and services. Maintaining a data warehouse and supporting marketers in the use of data mining and other tools, can help companies monitor the key product and service metrics.

 

Interruption of Supply

While frequently successful at stopping the bleeding of a focused attack, this approach often results in a rushed vendor selection process, integration of only the bare minimum of required data points and an implementation that places undue burden on operational staff to make up for integration design gaps. These inefficiencies can be costly in multiple ways, including roadmap disruptions, ongoing re-integration efforts, and in the incomplete utilization of the integrated tools, resulting in higher than necessary false positives and fraud. Once the current fraud attack has been mitigated and the status quo is achieved once more, focus on fraud prevention fades … until the next new attack. Many enterprise organizations, after decades of rapidly integrating technologies under fire, find themselves with a fragmented fraud prevention system that has been patched together and is not only costly and inefficient, but may actually hamper larger organizational efforts to improve data management and application architecture. Continuing to address fraud prevention strategy and design during crisis situations perpetuates a cycle of incomplete and ineffective integrations, thereby increasing the likelihood of future crises and rushed solutions. Additionally, a well-designed and contemplated fraud prevention strategy that integrates fully into customer interaction platforms and business intelligence tools can provide meaningful insights to the business related to end customers, risk levels of product lines, marketing efforts and new business channels.

Every major IT system has controls built into it to help avoid this sort of problem. Real-time operation minimizes the damage that will be done. Monitoring methods include Web-based surveys, analysis of usage data from digitally enabled products and services, and business activity monitoring systems. An enterprise resource planning system will help companies monitor goods receipts, which will give warning of temporary interruptions.

Monitoring the inbound supply chain — for example, goods at sea — can be done through supply chain management systems and electronic data interchange systems. These systems give companies more notice of problems, which may be enough to allow them to find alternative suppliers. Separate tracking of relevant events is also essential. Trend tracking through monitoring of searches through major Internet portals can give advance warning of political problems.

Recommendations

  • Listen to your world. Maintain open communications with suppliers and market intermediaries. Monitor political developments and commercial trends that might affect key suppliers.
  • Acquire research. Research changes in customer preferences, and keep tabs on political developments and commercial trends that might affect supply.
  • Improve foresight. Create several future market scenarios. Identify how poor service, product faults or public criticism on environmental or ethical grounds could harm your reputation, and plan ways to minimize the damage. Identify threat processes, like infrastructure decay or lapse of control.
  • Monitor activities. Monitor the key product quality and customer service metrics. Monitor physical phenomena that might interrupt supply. Monitor the threat processes.
  • Investigate oddities. Investigate anomalous customer and process behavior, in case it reveals unrecognized shifts.

There have been many well-publicized examples of events that took enterprises, or their shareholders, by surprise in recent years — and few of them were pleasant. By focusing on increasing the speed of their response to crises, executives may be accepting that unpleasant surprises are inevitable. But this is the wrong approach. Most crises could have been avoided, or the damage could have been reduced, if senior executives received and acted on available warnings.

Overcoming management myopia

IS cannot instill honesty or decisiveness in executives, but it can take steps to improve the flow of information. In addition, IS leaders can work with the enterprise leadership to change the context in which decisions are made by:

  • Ensuring that information is unmediated
  • Addressing the cultural challenges
  • Embracing tighter regulation
 

Ensuring that information is unmediated

Improved business monitoring systems would have helped in some of the crisis examples if the information was unmediated — that is, if junior and middle managers were not allowed to alter it. Many middle managers will doctor information that could provide warnings to hide embarrassing results. Information that is filtered through several management levels will be delayed and may be distorted out of recognition. Senior management needs to drive the change to unmediated information because middle managers will resist the loss of this ability. One effective way of achieving this is to set real-time reporting goals that leave no time for interference.

Monitoring systems that facilitate horizontal as well as vertical information flows provide additional benefits. For example, sharing information across functional boundaries would allow marketing staff to see the profitability of the customers they have recruited and buyers to see when their choice of suppliers leads to production delays. This would provide additional routes through which problems could be addressed (although the rigidity of silo structures may inhibit this).

Addressing the cultural challenges

In almost all the examples, the crises would have been avoided if senior executives had shown more humility and a greater willingness to accept that something had gone wrong. But this would have required a significant change in attitudes in many cases.

Embracing tighter regulation

Many of the best-known recent crises involved executive fraud. In most cases, the executives learned about commercial problems in good time, but chose to address them by dishonest means. Many of the executives began by using the sorts of financial engineering that are legal (or only just legal), but which conceal the true state of the business. They crossed the line into outright fraud as the problems developed.

In other cases, executives embraced legal and accounting measures (such as off-balance sheet vehicles) that were inherently dishonest. These actions deprived investors and other stakeholders of the information that they needed to recognize emerging problems and, as a result, of the opportunity to protect themselves. In addition, these actions ensured that, when the truth became known, the crises were much worse than they needed to have been.

The cause of these problems is a matter of attitude — in this case, dishonesty. For example, executives and auditors have ignored their duties dishonestly in some recent cases. IT systems and IS departments cannot ensure that people are honest. However, weak controls make it too easy for people to succumb to dishonesty. There will always be legal "gray areas" and gaps in auditor coverage, and determined fraudsters will seek them out. But governments are tightening up regulatory processes, which should make the slide into dishonest practice caused by weakness (rather than willful malice) less likely. The more rigorously enterprises implement these controls, the more protected their organizations will be. Enterprises should pay particular attention to the real-time issuer disclosure ruling set out by the U.S. Securities and Exchange Commission.

Key Challenges

  • The long-term strategic vision for fraud prevention activities (technical and operational) is rarely made a proactive business or technology priority with the same discipline or forethought given to other strategic initiatives.
  • Selection and implementation of new fraud prevention technologies frequently do not include sufficient participation from cross-functional stakeholders, resulting in poor customer experience and/or operational inefficiencies.
  • Integrations to third-party fraud prevention or fraud analytics tools are often rushed, and optional integration points such as supplemental data and deep postback integrations are missing or incomplete.
 

Recommendations

  • The owner of the technology vision and key initiatives (typically the CIO) should identify a cross-departmental working team for the design and requirements gathering phases of a fraud prevention design project and obtain support from operations and finance leadership to ensure full participation and prioritization
  • Operations leadership should evaluate fraud operations strategy alongside operational philosophies for security monitoring and customer service, taking care to understand the drivers behind historical outsourcing of these functions.
  • Business intelligence stakeholders should work with fraud leaders to define minimum viable data integration requirements based on cross-functional business and technology needs, including incorporation of marketing data, payment decline data and chargeback data.

For many organizations, the most common time to integrate a new fraud prevention technology or service is during the heat of a fraud attack that could not be adequately identified or prevented using legacy tools and processes. While frequently successful at stopping the bleeding of a focused attack, this approach often results in a rushed vendor selection process, integration of only the bare minimum of required data points and an implementation that places undue burden on operational staff to make up for integration design gaps. These inefficiencies can be costly in multiple ways, including roadmap disruptions, ongoing re-integration efforts, and in the incomplete utilization of the integrated tools, resulting in higher than necessary false positives and fraud. Once the current fraud attack has been mitigated and the status quo is achieved once more, focus on fraud prevention fades … until the next new attack.

Many enterprise organizations, after decades of rapidly integrating technologies under fire, find themselves with a fragmented fraud prevention system that has been patched together and is not only costly and inefficient, but may actually hamper larger organizational efforts to improve data management and application architecture. Continuing to address fraud prevention strategy and design during crisis situations perpetuates a cycle of incomplete and ineffective integrations, thereby increasing the likelihood of future crises and rushed solutions. Additionally, a well-designed and contemplated fraud prevention strategy that integrates fully into customer interaction platforms and business intelligence tools can provide meaningful insights to the business related to end customers, risk levels of product lines, marketing efforts and new business channels.

The design and ongoing management of fraud prevention technology and services should be part of an organization's holistic technology and operations architecture and should not be rushed. A successful fraud prevention design incorporates fraud technologies and analytics into the core platform architecture and requires full data integration as well as integration with CRMs, fulfillment systems, etc. While the technology needn't be built or managed in house, many organizations would benefit from an orchestration layer to send and receive relevant, rich data to and from third-party fraud technologies and internal applications and databases.

Create a Truly Cross-Functional Team for Current State SWOT Analysis

The selection of a fraud prevention provider is sometimes made in a silo, bringing in additional stakeholders only when a new integration is near completion, or requesting participation at an executive level but not including the relevant midlevel subject matter experts as part of the working team. As with any siloed technology or architectural decision, this can result in the discovery of key use cases and gaps in services too late to address without loss of time and money. When the decision is related to fraud prevention, the impacts can be even greater than with many other technology decisions, as a siloed approach may result in negative customer experiences, negative impact on revenue and marketing partners, and disruption to the transaction flow and audit trail for financial reconciliation.

 

References:

  • Hunt, L., Heinrich, K., & Leeson, N. (1996).Barings lost: Nick Leeson and the Collapse of Barings plc. Butterworth-Heinemann Asia
  • Rawnsley, J. H. (1996).Total Risk: Nick Leeson and the Fall of Barings Bank. HarperCollins
  • Rawnsley, J. H. (1996).Going for broke: Nick Leeson and the collapse of Barings Bank. Harper Collins
  • Greener, I. (2006). Nick Leeson and the collapse of Barings Bank: socio-technical networks and the ‘rogue trader’.Organization, 13(3), 421-441
  • Drummond, H. (2003). Did Nick Leeson have an accomplice? The role of information technology in the collapse of Barings Bank.Journal of Information Technology, 18(2), 93-101
  • Giddens, A. (1999). Risk and responsibility.The modern law review, 62(1), 1-10
  • Fay, S. (1996).The collapse of Barings. Arrow
  • Tremewan, C. (2016).The political economy of social control in Singapore. Springer
  • Partnoy, F. (2010).Infectious Greed: How deceit and risk corrupted the Financial Markets. Profile Books
  • Gunther, R. E. (2002).Wharton on making decisions. S. J. Hoch, & H. C. Kunreuther (Eds.). John Wiley & Sons
  • Partnoy, F. (2003).Infectious greed. Singapore Books
  • Introna, L. D. (2002). The (im) possibility of ethics in the information age.Information and organization, 12(2), 71-84
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