Daiwa Bank, 1995

Eleven years of losses, hidden by the man who kept the records

A bond trader at Daiwa Bank’s New York branch lost about $1.1bn trading US Treasuries over eleven years and hid it by selling securities held in custody and falsifying the records — records he controlled, because he also ran the branch’s back office. He confessed in a letter to the bank’s president in July 1995. The bank took about two months to tell US regulators, and that delay, more than the loss, ended its business in the United States.

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What the lesson covers

1. What happened
2. How it stayed hidden
3. The second failure
4. What it cost
5. What it teaches

Key terms

• Separation of duties — Keeping trading, confirmation, settlement and custody in different hands so no one person can conceal a trade.
• Custody — Holding securities on behalf of an owner, with records that are meant to prove they exist.
• Independent reconciliation — Agreeing internal records to a source outside the unit, such as a custodian or counterparty statement.
• Unauthorised trading — Trades outside a trader’s mandate or limits, often concealed by falsified records.
• Regulatory disclosure — A bank’s obligation to tell its supervisors promptly about material losses or misconduct.
• Back office — The operations that confirm, settle and record trades after the front office executes them.

Every key term, A to Z

In practice

Banks now require custody and settlement to report outside the trading line, reconcile positions daily against custodians, depositories and counterparties, and have escalation rules that send a discovered loss to the regulator within days. Supervisors treat a delayed disclosure as a fitness question for senior management, not a timing issue.

Read next

• Barings, 1995 — One trader, both sides of his own desk
• Sumitomo copper, 1996 — One trader, a grip on world copper, and ten years of hidden losses
• Société Générale, 2008 — Fictitious hedges, and a €4.9bn exit

In the app, Daiwa Bank, 1995 carries a five-step lesson, a worked example and a bank of twelve questions drawn differently every sitting.

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