I read a recent article on FT, where a rogue trader in the reputed swiss bank, managed to cause a loss of GBP2.3bn to the aforementioned bank. The scandalous expose was yet another series of events, post the sub prime mortgages crisis that led heavy write-downs for this bank, which has shaken the confidence of investors in the financial services.
The act occurred in the complex trading activity managed in the Delta one division of UBS. The modus operandi involves heavy buying and selling of Exchange traded funds, and subsequently offsetting the risk by hedging. Delta one sits in a unique position between propriety trading – trading for banks own account - and the normal “flow” businesses, created by making trades on behalf of clients.
The rogue trader, who was familiar with the trade settlement and the book keeping process in the back office for such transactions, managed to take unauthorised “speculative” positions in some of the key ETF’s such as SP 500, DAX and Euro Stoxx without proper assessment of hedging against the risk. In the normal course of events, the bank has sufficient trigger checks to invalidate such risk positions by automatically setting or offsetting the risks.
However, as the trader had sufficient knowledge on how the settlements of such trade take place, he managed to fake offsetting hedges to hide the losses.
It is yet to be seen how this bank, which was in news for its corporate restructuring and some controversial labour management acts, will be able to rise from this debacle.
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