SUPERVISION of Nick Leeson's Singapore trading operation was transferred to London after Barings' Tokyo office became concerned about maintaining proper controls.
The switch took place 'many months ago', and about the same time that Leeson's profits and trading started to shoot upwards, according to a well-placed source.
The Tokyo office was unhappy supervising the 28-year-old arbitrageur, and asked the London office to take direct control as an internal audit warned of a potential problem in Singapore.
'We did not want to take responsibility for the things Nick was doing,' said the source. 'He was always good as a trader, but at first he was making money but not outstanding amounts.' 'Then that changed. The volumes started to shoot up. We were very concerned about supervision.' The transfer of supervision switched Leeson's reporting line not just from Tokyo to London but also to a different department.
Before the change he was supervised by Barings Securities. After, by Baring Brothers & Co - the banking arm which had far less experience of the derivatives Leeson was trading in.
Leeson was supposed to have no exposure to Nikkei 225 movements. He was meant to trade the futures on exchanges in Osaka and Singapore - taking opposite positions on each exchange to cancel out the effect of Nikkei movement.
Markets do not work perfectly efficiently and there are often price variations between the two contracts.
Amounts made on each trade are tiny in percentage terms, and in theory the trade is almost risk-free.
The key to making profits was to achieve large volumes of transactions, which is what Leeson did.
Barings came to dominate a fifth or more of Nikkei trading on the Singapore International Monetary Exchange (SIMEX), and had total domination of some products on SIMEX.
According to accounts by Barings employees, Leeson appeared to stay within the limits.
But they say he kept a secret account which he claimed was held by clients, and it was there that huge loss-making long positions on SIMEX were kept.
Employees in Tokyo are still unsure of what happened. They knew an internal audit document was being prepared in the summer, but with the transfer of supervision to Barings' head office, they did not see it.
The audit, details of which were published in the Financial Times , was provoked by 'exceptional' profits produced by Leeson's unit last year.
The unit made US$30 million of realised profit in the first seven months, compared to group pre-tax profits of $87.1 million in the first half.
Control of the back office is thought to have been crucial to Leeson's alleged deception.
However, the report said: 'The general manager likes to be involved in the back office and does not regard it as an undue burden.' Some executives believe Leeson already had started amassing derivatives in a hidden account - called Error Account No 88888 - when the audit took place.
The account is said to have built up undisclosed losses of GBP50 million (about HK$615 million) by the end of last year, according to the Financial Times.
By the end of last month, Leeson is said to have transferred 60,000 futures contracts with a value of about GBP3.6 billion to a trading account in the bank's name which executives apparently did not realise existed.