They can certainly wreak widespread havoc. Rogue trader Nick Leeson lost £1 billion betting on Japanese stock market derivatives, effectively killing off Britain's Barings Bank in 1995.

Oil derivative trades sent jet fuel supplier China Aviation Oil (CAO) to the edge of the cliff in 2004.

Not much seems to have been learnt in the wake of such fiascos, and the seemingly obvious curbs that can rein in dangerous traders have not been imposed.

Two recent cases stress the need for scrutiny. In October last year, former SembMarine finance chief Wee Sing Guan cost the firm US$303 million (S$417.2 million) in dodgy forex trades. But that figure paled against Societe Generale's (SG's) losses of 4.9 billion euros (S$10.5 billion) after dealer Jerome Kerviel's unauthorised forex trades.

Yet, these 'exotic' instruments, once the preserve of corporate players, are now mainstream investments being sold to retail investors at bank counters.

At their simplest, they may involve a bank offering a higher interest rate on a fixed deposit if a client also places an equivalent sum in a foreign currency deposit. However, he risks losing part of his capital if the currency swings against him.

Derivatives get more exotic as they go up the pecking order, with a bewildering choice of options.

Sometimes, banks even offer to make an upfront payment - called a premium - if the client bets against the prevailing direction in which a currency or a commodity is moving. The client cashes in if the currency or commodity suddenly changes direction in his favour. If not, his losses could be staggering.

But as Banyan Tree chairman Ho Kwon Ping once observed, hoping for a sudden change in market direction is about the same as wishing for 'water to flow uphill and fish to have wings'.

No wonder Mr Buffett once asked if some of these contracts were devised by 'madmen', comparing the derivatives business to 'hell... easy to enter and almost impossible to exit'.

That aptly described the mire Mr Wee and former CAO chief Chen Jiulin found themselves sinking into, as they 'doubled up' on wagers to cover earlier losses. But bigger gambles brought even more losses. These left CAO with oil derivative losses of US$550 million in 2004.

SembMarine was also embroiled in a legal spat with France's BNP Paribas, one of the 11 banks involved in allegedly unauthorised forex transactions with Mr Wee.

So, why did all these experienced corporate players try to ride the tiger in the first place?

Mr Wee suspected he was in deep water. He recounted in a court document he later declined to sign on legal advice: 'I was wary of these exotic instruments. Because of the way they behaved, a small movement in the market against me would result in a big loss.'

Still, he plunged in, engaging in forex transactions such as 'boosted forwards', 'target dragon knockout forwards' and 'extendable snowball deliverable forwards'. The names alone should have stopped him in his tracks.

How have such 'toxic and hazardous' dealings gone unchecked?

The financial havoc they have wreaked on companies is enormous, but their destructive power extends far beyond that.

If BNP had succeeded in its High Court bid to wind up Semb-

Marine unit Jurong Shipyard, the livelihood of 2,200 workers and their families would have been in jeopardy as well. And how many of them would have heard of a 'target dragon knockout forward'?

Still, it would be naive to blame the bankers who created the derivatives and established a market for them. Derivatives have flourished because of a growing need by investors to hedge risks, that is, buy insurance against market movements.

Banks themselves have become victims. Witness the bloodshed on Wall Street this year.

Surely, it is time to organise a 'summit' to consider if controls should be imposed on financial derivatives. Two issues come to mind.

Despite Mr Leeson's revelations that he managed to hide his rogue trades through the infamous Error Account 88888, variations of the same theme keep resurfacing, whether at SembMarine or SG. Surely, there must be ways to vet such accounts and prevent abuse.

The one-size-fit-all contracts still used by banks across the world for derivatives trading should also be put under the spotlight. From SembMarine's legal wrangle, it is clear many company boards do not appreciate the risks they are undertaking in signing such agreements.

Mr Buffett looks like the ideal candidate to chair the summit and call on witnesses such as Mr Wee, Kerviel, Chen and Mr Leeson.

engyeow@sph.com.sg