Regulators’ Use of Third Party to Probe UBS Trades ‘Bizarre,’ Analyst Says
U.K. and Swiss regulators’ use of a third party to investigate UBS AG (UBSN)’s $2.3 billion trading loss was called “bizarre” by an analyst who said the agencies should have the expertise to conduct the probe on their own.
The investigation will be handled by a firm that’s independent of UBS, the Financial Services Authority and the Swiss Financial Market Supervisory Authority said Sept. 16. Kweku Adoboli was charged the same day in London with fraud and false accounting, less than 36 hours after he was arrested.
“It’s a bit bizarre,” Fred Ponzo a former trader at Societe Generale SA and a capital markets adviser at Greyspark Partners in London, said in a telephone interview. The activities “were a bit more exotic than share trading, but the FSA should be able to carry out the investigation.”
The joint Swiss and U.K. probe will be conducted at the same time as investigations by police, prosecutors and an internal review by Zurich-based UBS. The FSA and the Swiss regulator, known as Finma, said their investigation will focus on the details of the allegedly unauthorized trades, control failures that allowed them to happen, and an assessment of the bank’s methods to prevent fraudulent trading.
The loss, initially estimated on Sept. 15 at $2 billion, came from trading in Standard & Poor’s 500, DAX and EuroStoxx index futures over the past three months, the bank said in an e- mailed statement yesterday.
‘Normal Business Flow’
“The positions taken were within the normal business flow of a large global equity trading house as part of a properly hedged portfolio,” UBS said in the statement. The magnitude of the risk was masked by “fictitious positions,” UBS said.
UBS notified the police and regulators of the unauthorized trades early in the morning of Sept. 15. Adoboli was arrested at 3:30 a.m. and remains in police custody. He is being held until Sept. 22, when he can request bail at a court hearing.
David Sidwell, the senior independent director on UBS’s board and a former chief financial officer of Morgan Stanley, will lead an internal three-person committee that will look into the trading and the bank’s controls.
The Financial Times reported that accounting firm Deloitte would the conduct the Swiss and U.K. regulatory probe. Rachel Cohen, a spokeswoman for the FSA in London, declined to comment.
Two years ago, the FSA fined UBS 8 million pounds ($12.6 million), at the time the third-largest penalty ever imposed by the regulator, for not stopping employees in its U.K. international wealth-management business from making unauthorized trades with customer money.
UBS’s loss is the largest of its type since former Societe Generale derivatives trader Jerome Kerviel caused a 4.9 billion- euro ($6.8 billion) loss in 2008.
The FSA said in a March 2008 policy document it had discussed the Kerviel case with as many 50 banks in London and that “many had already put in place reviews to ensure they identify any gaps in trading controls and close them as soon as possible.”
The FSA warned banks to monitor traders’ positions for material risks and said that most firms were satisfied “that their basic controls and governance surrounding trading, risk management and settlement activities are effective.”
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