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UBS May Move Proprietary Stock Trading to Asset Management

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UBS AG, Switzerland’s biggest lender, may move its proprietary stock-trading business to its asset-management division, Chief Financial Officer Tom Naratil said.

The move would affect about 50 people working at a business that produced revenue of $65 million in the fourth quarter, Naratil said in an interview in Zurich today. If the plan goes ahead, UBS would give the unit seed money and then seek outside investors, he said.

“We do plan to exit that business at the investment bank,” Naratil said. “However, we do think that the strategies that the proprietary equity team pursues would actually be attractive to asset-management clients.”

UBS, which is cutting risk-taking at the investment bank to focus on wealth management, told investors in November that it’s evaluating options for the equities prop trading unit. The business may be moved in the “coming quarters,” Naratil told analysts earlier today.

The Zurich-based bank has to close its proprietary trading operations in the U.S. because of the so-called Volcker rule, while elsewhere it doesn’t fit with UBS’s strategy even though it’s a “very good profitable business for us,” he said.

“If we’re successful in getting this into global asset management, we think there’s a great way to show that we can use a proprietary trading strategy in a way that benefits clients,” Naratil said. “And over time, we won’t have our money involved.”

Dillon Read

The unit would be placed within the existing alternative and quantitative business of asset management, he said. That would help to avoid mistakes made in 2005 when the company moved its fixed-income proprietary trading team into an internal hedge fund, called Dillon Read Capital Management LLC, within the asset-management, he added.

While the goal back then was to set up funds in which third-party investors could participate, the investment bank started replicating the strategies pursued by DRCM, including trading in U.S. mortgage securities and collateralized debt obligations. The oversight of DRCM, led by former head of the investment bank John Costas, was “relatively complex,” which contributed to the bank’s losses as the subprime-crisis unfolded, UBS said in a 2008 report to shareholders.

Subprime-related problems first surfaced in March 2007, as DRCM traders informed UBS of about $50 million in writedowns. Losses at the hedge fund company grew to 150 million Swiss francs ($162 million) in the first quarter of that year, and in May UBS said it would shut DRCM down.

UBS’s total writedowns and losses from the credit crisis surpassed $57 billion.

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