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. Last Updated: 07/27/2016

Barings Sinks Under $1 Billion Blow

Baring Brothers, one of Britain's oldest and most established merchant banks, with century-old ties to Russia, faced imminent collapse Monday after reports emerged that a single trader had lost over $1 billion in derivatives trading.


A Singapore-based securities trader for Barings, whose prestigious client list includes Queen Elizabeth II, gambled over $27 billion in derivatives on Tokyo's stock exchange, sending world financial markets into a tailspin Monday.


The Bank of England, Britain's central bank, tried over the weekend to attract buyers for the Barings group after the magnitude of the bank's losses became clear, Reuters reported from London. In the meantime, the bank has applied to be put under the administration of international accounting firm Ernst & Young.


The Tokyo Nikkei Stock Average closed Monday down 3.8 percent, a 15-month low. The pound also took a beating as investors rallied around the Deutsche mark and the Swiss franc, and London's FTSE 100 closed down 12.4 points, news agencies reported.


However, Barings' crisis barely affected Moscow on Monday, with investors remaining calm as world markets tumbled. The MT Index edged down 0.08 points to close at 113.26.


"The direct effect on Russia should be negligible, a hiccup," said Thomas Reed, an analyst at AIOC Capital, contacted mid-afternoon Monday. "I haven't seen any effect that is not an ongoing trend from last week."


Reed added that while the bank's collapse might scare international investors away from emerging markets in the short term, a shakeup on the order of January's Mexico crisis -- when the peso lost more than a third of its value, and investors poured out of emerging markets -- is not in the cards. "The scope of this is radically different," he said.


Another senior Western analyst said, however, that Barings' woes are likely to make investors think carefully before putting their money in Russia.


"I think this will definitely give investors pause before putting their assets into Russia, especially when you consider what's happened on the Mexican, Chinese and Indian markets," the analyst, who declined to be identified, said, referring to the slump in emerging markets after the Mexico crisis.


Barings' links with Russia date back to 1850, when the bank helped finance construction of the Moscow-St. Petersburg railroad.


Founded in 1763, Barings was once described as one of the six great powers of Europe, along with England itself, Russia, France, Austria and Prussia.


In 1994, Barings invested between $3 billion and $4 billion in Eastern European and CIS securities, with Russia accounting for the lion's share.


Barings also jointly manages the $160 million First NIS Regional Fund.


But banking sources reached in London said the crisis will have no effect on the NIS Fund.


"The NIS Fund should not be impacted by the current difficulties Barings is undergoing," said one source, who declined to be named. "The fund is an independent legal and financial company, whose assets are administered by a third-party custodian. The fund's assets are secure."


Police were searching Monday for the 28-year-old British manager and trader at Barings Futures Singapore, who has been identified in media reports as Nicholas Neeson.


The use of derivatives -- sophisticated financial tools whose value derives from changes in other financial instruments, such as interest rates or currency and commodities markets -- has come under fire in recent months, following a number of well-publicized cases of investors incurring huge losses.


Britain's finance minister, Kenneth Clarke, said Monday he would review Britain's banking regulatory system after Barings' collapse, Reuters reported.


Many Moscow-based economists said the lessons from the Barings crisis are more likely to lie in the use of derivatives, rather than in emerging markets.


"Barings lost money trading in Japanese futures," said Miljenko Horvat, president of Citibank, Russia. "There are many lessons [here] about risk exposure when using derivatives, but not about risks on emerging markets."