FSA Fines UBS, Swiss Regulator Keeps Bank Under Watch After Rogue Trader Loss

Tom Burroughes

26 November 2012

The UK financial regulator has fined UBS £29.7 million , while the Swiss financial regulator is scrutinising steps taken by UBS after the Alpine state’s largest bank suffered a $2.3 billion trading loss inflicted by a rogue trader, who was jailed last week. UBS has been put under restrictions over risk-taking at the investment bank, which is also banned from making new acquisitions.

The Financial Services Authority, and Switzerland's FINMA issued a statement today about the Zurich-listed bank after a UK court last week convicted Kweku Adoboli, who had worked on UBS’ “Delta One” desk, of losing the money due to unauthorised trading. He was jailed for seven years.

The FSA fine on the bank was discounted from £42.4 million for early settlement; the fine was for "systems and controls failings that allowed an employee to cause substantial losses", the FSA said. "The systems and controls failings revealed serious weaknesses in the firm’s procedures, management systems and internal controls," it said.

Among the failings discovered by the FSA were: The computerised system operated by UBS to assist in risk management was not effective in controlling the risk of unauthorised trading. The trade capture and processing system had significant deficiencies, which Adoboli exploited in order to conceal his unauthorised trading.

Additionally, the FSA found that the UBS system allowed trades to be booked to an internal counter-party without sufficient details, there were no effective methods in place to detect trades at material off-market prices and there was a lack of integration between systems.There was an understanding amongst personnel supporting the desk that the operations division’s main role was that of facilitation. Their main focus was on efficiency as opposed to risk control and they did not adequately challenge the front office. There was inadequate front office supervision. The supervision arrangements within GSE were poorly executed and ineffective, it said.

Swiss statement

“The proceedings launched by the Swiss Financial Market Supervisory Authority FINMA into UBS's trading losses in London have highlighted serious deficiencies in risk management and controls at UBS' investment bank,” it said.

“In FINMA's view, the fraudulent transactions executed by the rogue trader would have been detected sooner if these deficiencies had not existed. As soon as the unauthorised trading activities became known, FINMA imposed preventive measures to limit UBS's operational risks. Now that its proceedings have been completed, FINMA is appointing an independent third party to ensure that corrective measures are successfully implemented,” it said.

UBS has already moved to reduce its risk exposures at the investment bank, putting even more focus on the firm’s flagship wealth management business.

In a bluntly worded statement, FINMA pointed out that as soon as the losses were discovered last year, it had, until further notice, banned UBS’s investment bank from making new acquisitions and capped its risk-weighted assets, while also ensuring that such risk-weighted assets fall over time.

The regulator pointed out that since the trading losses, “UBS has introduced a large number of organisational measures to strengthen its risk management and control capabilities. Action has been taken on the personnel front, core processes in the front and back offices have been modified, and deficiencies in the processing of trades have been addressed. These, along with other measures, are currently being implemented.”

On 13 December last year, FINMA spelled out its expectations about controls concerning unauthorised lending and it is checking to see if the country’s most “important supervised institutions” can meet these standards.

FINMA is appointing an independent investigator to control the implementation and completion of the corrective measures at UBS and when this process is finished, the regulator will use an auditor to check whether UBS’s reforms have worked. It added that it is looking at whether the bank must increase capital backing for its operational risks.

In September last year, the Swiss and UK regulator started a probe into the events at UBS.

The bank had discovered that the trader, who was employed on the exchange-traded fund desk, had been engaging in unauthorised trading.

“By using a range of prohibited mechanisms, he succeeded for a substantial period in covering up the actual scale of his trading positions and the risk they posed. The mechanisms used included one-sided internal futures positions, the delayed booking of transactions and fictitious deals with deferred settlement dates,” FINMA said.