But having said that, it seems to me that any model for self-regulation depends for its effectiveness on an effective policing body. If an effective regulator was required then that should be the criterion applied to potential candidates, he said.The bluff Yorkshireman served Lady Thatcher at Downing Street for 11 years and now writes a column for the Daily Express. If the price of oil went up, you would pocket the benefit of buying at today's prices without having stumped up for the oil. If you bet wrong, you would pay the full loss of buying the oil at the old price and selling it at a lower price.Where did Barings go wrong?The trader made a huge bet that Japanese share prices would rise before mid-March. They have been falling instead.Why has the growth in derivatives been so rapid?Since the world abandoned fixed exchange rates in 1973, financial markets have grown increasingly volatile, driving up the demand for precautionary measures. Growth in derivatives based on financial assets such as bonds, currencies or shares, has exploded since the mid-1980s.Why have derivatives suddenly become such a worry?What has scared regulators is the way banks have taken to speculating by using derivatives to make risky bets at low cost They began to issue warnings about derivatives in 1992.
Financial institutions made millions of dollars in 1993 when they bet that interest rates would fall and stock markets would rise. The bet came unstuck when US authorities unexpectedly raised interest rates last year - catching out most punters in the banking community.. For the likes of Tony Benn, the collapse of Barings bank vindicated all their warnings about the casino economy "This is gambling It is speculation. It characterises the world financial community," the veteran left-winger told the Commons.
Less predictably, a similar view of the derivatives market, in which the bank's £600m-plus losses were sustained, was taken by Sir Peter Tapsell, Tory grandee, stockbroker and bank adviser. There was "rather a fundamental difference" between a futures market in things such as agricultural products, base metals and oil, and one which sought to guess the movements of stock exchange indices, Sir Peter observed during exchanges on a statement by Chancellor Kenneth Clarke."That latter form of futures market really is so speculative in nature as to deserve the term `gambling', and perhaps should be banned in international law."But Mr Clarke said most banks engaged in some derivatives trading. "We have to ensure the regulations stop pure gambling - purely taking positions of a highly speculative, impossibly risky kind - and make sure we do not over- regulate."Announcing an inquiry by the Board of Banking Supervision, chaired by Eddie George, Governor of the Bank of England, Mr Clarke said when the full facts were known all the lessons would be drawn and, if necessary, corrective steps taken."This failure is, of course, a blow to the City of London. But it appears to be a specific incident unique to Barings centred on one rogue trader in Singapore."Gravity temporarily deserted the Chancellor as he dwelt on the disappearance of the said trader, 28-year old Nick Leeson from Watford. Dale Campbell- Savours, Labour MP for Workington, said Mr Leeson might have a very different story to tell and his life could be at risk.Mr Clarke thought the MP was dramatising matters but was right to say they could not leap to the conclusion that there was fraud and criminal offences "We have no idea. Mr Leeson has left his desk." Chuckling, the Chancellor went on: "That is no doubt because, at the very least, he finds it embarrassing to describe his responsibility for a series of investments which has brought down an entire 250-year-old banking group. His explanation will indeed be interesting when he emerges."For Dennis Skinner, Barings was the latest victim of the "betting-shop mentality" he has railed against for years. The Chancellor should "call a spade a spade", the Bolsover MP said.
"Derivatives and gambling on derivatives is based, in this case, on betting on the Japanese stock exchange in another 12 months' time. What wealth creation is there in that?"Here we have got one of the elite banks going under because somebody gambled just like somebody in the betting shop, one after another trying to recoup their losses when all those jobs were at stake."Sir Peter Tapsell apart, the message to Mr Clarke from the Tory benches was to maintain "a light touch" on regulation. Peter Brooke, MP for the City of London and a member of Lloyd's, told the Chancellor: "Whatever the lessons of this bitter failure, will he ever be mindful the pre-eminent position of the City of London derives from its skilful acceptance and management of risk If excessive regulation to remove risk ... Companies - or farmers - use them as a kind of insurance policy.For the farmer fearful of a bad harvest, or a company importing raw materials it must pay for in foreign currency, derivatives are invaluable. Simple derivatives give the right to buy or sell another asset for a particular price at a particular date (a future) or the chance to do so (an option).How can trading in derivatives lead to such huge losses?Because users are able to bet on changes in the price of an asset at a fraction of the cost of buying that asset.For instance, on a futures exchange you could buy the right to acquire 1,000 barrels of crude oil at a certain price in six months by putting up a tenth of the cost of that oil. What on earth is a derivative? A financial instrument used to bet on changes in the prices of assets ranging from wheat or oil to shares and bonds. Derivatives were invented to protect businesses from unpredictable fluctuations in commodity prices, interest and exchange rates.
