Today marks a day in history within the banking sector when London Police arrested a 31 year old banker suspected of a $2bn fraud within the Swiss Banking giant UBS.
Not surprisingly, the bank is not giving out more details to the market until all the 'positions' are closed and the dust settles, however under the disclosure rules they have already given a statement to the market about a potential $2bn loss as a result of this unauthorised and rogue trading. There is also news in some editions that this hit could result in UBS going into the red for the quarter.
The banker arrested and identified as Kweku Adoboli used to work at the equities desk of the Bank popularly called as 'Delta One'. Potentially trading in Exchange Traded Futures (ETF). I will definitely do a separate article on ETFs in the near future so watch this space!
What strikes to mind immediately after hearing the news is that a loss as big as this is unlikely to involve a plain vanilla trade. It is likely to be more structured and complicated and potentially involving the use of derivatives too. As days progress we will obviously have more details but in the mean time the other obvious question is the role of risk management and the internal controls which operate within the bank.
Process brief
Generally, you would expect the trader to be entering into his deals from his desk either through phone or through his computer terminal. The deal would be in the recorded in the front office system and picked up by the back office team. This would be followed by the middle and back office taking appropriate steps to ensure functions such as sending and receiving of trade confirmations with the counterparty, front to back office reconciliations, cash/ nostro reconciliations, daily P&L calculations etc etc.
What if the trader enters into a deal but does not inform the back office?
A number of things can happen through which this could be identified. These could be (i) control operators listening to recorded telephones, (ii) identification through margin calls as one would expect counterparty to ask for margins in such big positions specially those that can generate such big losses, (iii) identification through nostro reconciliation if any payments have been made, (iv) independent confirmations process, (v) limits monitoring and so on.
In a nutshell, it would not have been easy to run such large open positions given the compliance and risk management policies that a lot of banks are investing in heavily. There will be a lot of questions to ask of the risk management team as to how this happened and why no one was able to detect it.
It also brings into question the role of regulators and internal auditors? What have they been doing if they did not identify in their periodic reviews of internal controls? The details are still very sketchy so it will be an interesting point to see what comes in the details.
Some even say that the future of investment banking in UBS hangs in a balance specially having to bear this rogue trading incident after all that they went through in the credit crisis! The traders immediate boss has already resigned and we wait to see what comes out in the days to come.
Follow for more updates to come!
The latest news that has come today in various sections of the press is that UBS has increased the estimated loss to US$ 2.3bn out of these unauthorised trades that have been made.
ReplyDeleteFull details are still not available in terms of the actual mechanism of how these trades happened. There is a lot of speculation in the market however will post when more details are available.