Exclusive: UBS’s operational risk management unit used rogue trader loss events data

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By:
Lianna Brinded
Published on:

Euromoney exclusively reveals that UBS’s operational risk management unit uses a database of case studies of major loss events, including other rogue trader scandals in history.

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In the wake of UBS losing around $2.3 billion in a rogue trading scandal, Euromoney can reveal that the Swiss bank’s operational risk management unit had installed a database of case studies of loss events. The database holds information on other major unauthorised trading events such as Barings and Societe Generale’s own scandals in order to help UBS identify rogue trading for themselves.

This piece of news does not bode well for UBS’s reputation for risk management which has been called into question over a number of years.

Euromoney has found out that the Algorithmics service is purely a database for case studies of loss events that operational risk management units can use to help them assess rogue trading scandals and prevent one of its own, and while it is not an analytics or quantitative assessment the news is bound to cause embarrassment at the bank.

Algorithmics, a technology company that specialises in risk management solutions, confirmed the nature of the service it provides for UBS, and also emphasised that it is purely a non analytical database and the company does not provide any risk management systems in any capacity for the Swiss investment bank.

Last week, Kweku Abodoli was charged by UK authorities for the unauthorised trading of S&P 500, DAX and Eurotoxx index futures over the last three months. Sources say that when attention was called to the nature of his trades he changed to dealing with forward settled exchange-traded funds (ETF).

UBS says that the positions were not in themselves extraordinary, rather they were taken within the normal business flow of a large, global equity-trading house as part of a properly hedged portfolio.

Currently there are three investigations underway at UBS with one being conducted by the bank itself to work out what went on and two further independent investigations being carried out by the bank’s board of directors and its lead regulator.

Before the sub-prime crisis, UBS thrived for decades on the back of its strong track record in risk management. This was particularly important for its market leading private banking and wealth management division.

However, that reputation was quickly lost as the extent of UBS’s losses across its main divisions were revealed in 2007 and 2008. UBS admitted to structural failings in risk management throughout its business in a report requested in April 2008 by the Swiss Federal Banking Commission.

In the aftermath of UBS’s losses, the bank suffered quarter after quarter of net outflows from wealth management clients. Grubel, the former Credit Suisse chief brought out of retirement to run his former competitor, has spent the past two and a half years attempting to redeem UBS’s reputation. Client business began recording net inflows again last year. Now much of that work risks being undone by the actions of one rogue trader.

Euromoney contacted UBS for comment on the database of case studies of loss events and its risk management practices. At the time of print of this article, Euromoney has not received a response.