Futures group seeks safeguards

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The Independent Online

Financial Editor

The risk of another Barings should be much reduced by the implementation of 60 recommendations issued yesterday, the Futures Industry Association said.

"We have not heard the last from rogue traders, but we can certainly do more to contain the systemic effects of something like Barings happening again, and lessen its likelihood and magnitude," said Michael Philipp, chairman of the FIA Global Task Force set up after the crash of the City merchant bank under pounds 900m of derivatives losses.

The FIA, the US-based international association that acts as principal spokesman for the futures and options industry, consulted all main exchanges, leading trading houses and a cross-section of big corporate clients for the report.

The FIA rejected any suggestion it was black-marking any particular exchange, and said it had made no specific criticism of the Singapore Futures Exchange (Simex) in the light of the Barings collapse. Nick Leeson, the Barings futures trader whose ruinous speculation broke the bank, was based in Singapore.

"There is no doubt, however, that exchanges could benefit from these new regulations and recommendations," said John Damgard, chairman of the FIA.

Among the key lessons from Barings is a recommendation calling for proper separation between customer and proprietary accounts, and active monitoring of proprietary trading activities, including the establishment of risk- based position limits.

"In the case of Barings both proprietary trading and customer trading was going on in the same account," said Mr Philipp, who has recently resigned from Merrill Lynch to take up a position next month as head of global market sales of Deutsche Bank/Morgan Grenfell.

The recommendations also insist on adequate separation between the administrative, trading and risk-management functions within broking operations. "The first things that jumps out from Barings was the lack on internal controls and disciplines at the broking level. If these procedures had been in place, it would have gone a long way to preventing the Barings situation," Mr Philipp said.

The FIA said regulatory authorities should have ready access, on a need- to-know basis, to the size and ultimate beneficiary of customer positions.

If traders were engaged in arbitrage between exchanges - as Mr Leeson was between Singapore and Osaka - then each exchange should be able to access information from other exchanges on a confidential basis, on condition it must not be used for commercial purposes.