Risk Management

12:33 PM
Melanie Rodier
Melanie Rodier
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UBS's $2 Bln Rogue Trader Loss Shines Embarrassing Spotlight On Risk Controls

A US$2 billion miss in equities trading is inexcusable.

Rogue traders who have caused multi-billion losses to their firm have just added another notorious member to their fold.

Police in London have arrested a 31-year-old UBS trader in connection with allegations of unauthorized trading which cost the Swiss banking group an estimated $2bn.

The arrest happened on the day the lower house of Swiss parliament was due to discuss the country's banking laws to reduce the risks from firms that are considered "too big to fail."

A couple of billion dollars is not as much of course as the $7 billion Soc Gen is estimated to have lost in 2008 at the hands of rogue trader Jerome Kerviel (then also 31), but it is nonetheless a dagger in the side of UBS, which recently announced 3,500 jobs cuts.

The UBS trader, Kweku Adoboli, is believed to work in the European equities division. He was arrested at 3.30 am and remains in custody.

In a letter to its 65,000 staff, UBS warned that the rogue trades could hit profits."

The matter is still being investigated, but UBS's current estimate of the loss on the trades is in the range of $2bn," the bank said. "It is possible that this could lead UBS to report a loss for the third quarter of 2011. No client positions were affected. While the news is distressing, it will not change the fundamental strength of our firm. We urge you to stay focused on your clients, who are counting on you to guide them through these uncertain times," UBS added.

So, the (2) billion dollar question is, what happened to UBS's risk controls?

Unlike the Soc Gen case, where Kerviel had previously worked in the French bank's back office and was able to circumvent the risk management system, the UBS case seems a lot simpler.

"To me, it's an IT problem. The reason I say that is that everyone has been mandated to have pre-trade risk controls in place. Everyone should have decent market surveillance in place. UBS does have multiple pre-trade risk controls in place," Adam Honore', research director at Aite Group, tells WS&T.

Despite the financial crisis and volatile markets, a lack of risk controls cannot be blamed on a lack of funds. Or a lack of regulation. Or some obscure asset class.

"There's an overabundance of commercial solutions in this space. If we were talking derivatives or fixed income, you could maybe understand it, because you're still dealing with spreadsheets. But if you're talking equities, that's bread and butter, everyone should have risk monitoring in place for risk equities," Honore says.

No one can blame tight budgets, Honore' underlines. In his blog , he points out that "budgets have more than doubled in the last two years, and most capital market firms now spend more than 10% of their technology budget on risk and compliance."

If UBS is using a risk system it bought from a vendor, the vendor should be identified and publicly called out, Honore' writes. "Too much technology gets sold on marketing."

Then again, Honore' says, if the Swiss bank decided to build rather than buy one of the many commercially available risk solutions because the person in charge of the decision wanted to protect their job and not because they could do it better, in their next position they should be asking, "Would you like fries with that?" He adds: "A US$2 billion miss in equities trading is inexcusable."

So, the UBS case would seem at first glance to be a simple question of a crook and someone else not doing their job. That's right, you can probably blame the loss on someone with an embarrassingly costly, bad attitude.

Melanie Rodier has worked as a print and broadcast journalist for over 10 years, covering business and finance, general news, and film trade news. Prior to joining Wall Street & Technology in April 2007, Melanie lived in Paris, where she worked for the International Herald ... View Full Bio
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