How UBS could not prevent 31-year-old trader Kweku Adoboli from blowing $2 billion of its capital remains the question of the day. Here’s what’s been gleaned in the past 24 hours.
QUIET QUAKER DAYS OVER -- In a little over a decade, Kweku Adoboli went from studying at a quiet Quaker boarding school in northern England to finding himself at the center of a major U.K. investigation into rogue trading.
Since September 2006, the 31-year-old Mr. Adoboli has worked in the European equities division of UBS, focusing in particular on exchange-traded funds, large baskets of securities that often track particular stock indexes or commodities.
Adoboli worked on the Delta One desk, a trading unit that executes relatively low-risk trades usually using computer algorithms, according to a Linked-In page.
Before that, Adoboli worked for three years in a back-office position as a trade support analyst.
Adoboli graduated, with honors, from the University of Nottingham in July 2003 with a bachelor's degree in e-commerce and digital business. Before college, Adoboli attended the Ackworth School, a Quaker boarding and day school located in West Yorkshire, England. The school costs about $41,000 a year for international boarding students.
GASPS OF DISBELIEF -- UBS has a history littered with mismanagement and outright fraud.
It lost more than any other European bank during the 2008 global financial crisis with a net loss that year of SwFr 20 billion (£14.44 billion) - the biggest in Swiss history. In total it had to write-down more than $50 billion of toxic investments.
Two years ago it paid a $780 million fine to the US authorities for allowing American citizens to evade tax through offshore accounts.
Shortly after that it was fined £8 million by the Financial Services Authority and paid £26 million in compensation after four bankers in its London private bank for unauthorised trading and concealing losses.
Today's revelations add solid fuel to Sir John Vickers' recommendation that retail banking must be ring-fenced from the riskier investment banking business.
But the truth is that regulation alone can never stop rogue traders. It is up to individual banks to ensure that their own control and risk systems work.
TECHNOLOGY, RISK MANAGEMENT FAILURE -- “It couldn’t come at a worse time for UBS,” said Fred Ponzo, a former trader at Societe Generale and capital markets adviser at Greyspark Partners in London. “The thing is, it’s very hard to go through the fail-safes by error. The only way to dig a hole this big is by design. You have to ask the question that if this is a $2 billion hole, is this is a failure of technology and risk management?”
The loss is “the final straw in UBS’s ambitious build-out to a tier-one investment bank,” wrote JPMorgan Chase & Co. analysts led by Kian Abouhossein in a note to clients yesterday. “First, we think we’ll likely see management changes within UBS’s investment bank. Second, we expect UBS will come under material pressure from shareholders” and regulators to review its investment banking division.
UBS declined yesterday to say how the trading allegedly lost the bank $2 billion. Traders at other firms speculate that UBS may have failed to adequately hedge the currency risk related to an exchange traded fund, known as ETF, or mistakenly placed a currency swap the wrong way, according to executives at other firms who declined to be identified. When the Swiss National Bank, Switzerland’s central bank, announced its limit on the currency Sept. 6, the franc fell more than 8% against the euro.
DELTA ONE DEFINED -- Delta One traders profit on cost and margin differences between derivatives and their underlying securities, and by timing the purchase and sale of each element.
The derivatives they use include exchange-traded funds, swaps and futures. As a member of the trading desk, Adoboli helped structure ETFs for clients and then hedge the bank’s positions to safeguard against potential losses.
ETFs give buyers exposure to illiquid or complex baskets of assets. For example, an investor looking to bet on the movement of the FTSE 100 Index can buy a single ETF rather than individual shares in all 100 companies in the index. Investment banks such as UBS structure such ETFs by buying the underlying assets.
The desks take the Delta One name because price movements in the derivatives they create move almost in lockstep with the underlying securities. This relationship is defined as having a delta of one or close to one.
MANAGING THE DELTA -- Buying a derivative that closely tracks an underlying asset can be easier or less risky than buying the asset itself. Instead of buying bars of gold, a hedge fund manager may buy an exchange-traded commodities fund, or even a gold fund. These derivatives can also be attractive because they typically require little upfront capital.
A reason for the success of this particular desk is the explosive growth of exchange-traded funds — an investment class that tracks indexes or baskets of assets. Also helping the growth of these desks is increased demand from investors for computer program trading, which uses mathematical models to execute lightning-fast transactions.
The significance may not be in the trade itself, but in what oversight the bank had on the trader’s position — or whether the trader hid the risk from compliance officers. The losses could have resulted from a trade on a behalf of a client, in which case the bank would have taken the other side of the trade. But the bank may have mistakenly allowed its position to grow excessively, or failed to hedge it. Or the bank could have decided to hold on to the position after making the trade for the client, thereby putting its own money at risk.
SMALL REBOUND -- Ratings agency Moody's put UBS's credit grade on review for possible downgrade. UBS shares on Friday recovered a fraction of the losses they suffered the day before. Shares were up 2.5% to 10 Swiss francs ($11.45) on the Zurich exchange by noon. Shares had slumped 10% the day before.
Respected banking professor Hans Geiger told Swiss television station SF he doubted the lone trader account put forward by UBS.
UBS spokesman Andreas Kern declined to comment on a report in Swiss newspaper Tages-Anzeiger on Friday, that the entire trading team in London where the alleged unauthorized deals took place had been suspended.