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UBS Loss Reveals Gaps
The alleged unauthorized trading at UBS AG that resulted in a $2.3 billion loss is shining a spotlight on a loophole in European trading rules that soon could be closed.
One avenue of the bank's inquiry, entering its seventh day, is examining whether the trader had knowledge of rules regarding how exchange-traded funds are settled in Europe, according to people familiar with the matter. A gap in trade reporting likely contributed to a breakdown in a paper or electronic trail that typically would reconcile cash and trading flows at UBS, people familiar with the situation said.
The trading scandal comes as European regulators are considering ways to shore up trading rules. The European Commission next month is expected to propose a new framework that will address questions about the European exchange-traded-fund market's transparency.
People familiar with the matter have identified the trader as Kweku Adoboli, a 31-year-old Ghanaian who has been charged criminally in the U.K. with fraud and false accounting. He remains in custody. Lawyers for Mr. Adoboli, who hasn't entered a plea and isn't yet required to, declined to comment.
The trader allegedly incurred losses betting on U.S. and European stocks, UBS said in a statement Sunday. To conceal speculative trading, which was prohibited on the UBS desk in question, the trader established a mirror trading book by using phantom positions in exchange-traded funds, or securities that mirror indexes, the people familiar with the situation said. The goal was to match the parallel trading books to minimize glaring gains or losses.
Although some details remain unclear, the trader was able to make it look like he conducted the ETF trades without setting off alarms because some trades don't require trade confirmations. If trades actually had occurred and had been entered in UBS's computer systems, profit and losses from those trades then would have been tracked, said people familiar with the matter.
In the U.S. ETF market, ETF trades take place across an exchange, establishing a trail of trade tickets. But in Europe, where the UBS desk traded index futures and ETFs, ETF trading is more opaque because the majority of trades don't actually occur across a public exchange. Instead, the trades are over-the-counter, or bilateral, trades between investors, including banks, and require less reporting.
In the U.S., there are about $1 trillion in ETF assets, compared with $321 billion in Europe, according to BlackRock Inc. ETFs, considered a cheaper and more liquid alternative to traditional stock-index funds, have ballooned in popularity.
In the U.S., because ETF trades have to be reported through an exchange, 'the audit trail is much more defined and regulated than in Europe,' said Richard Keary, principal and founder of Global ETF Advisors, a consulting firm in New York.
The gap in European ETF reporting has been known for several years. In a 2009 article, U.K. financial media outlet IFAonline reported that 75% of European ETF trading took place off-exchange in what it called 'a legislative anomaly' that meant 'none of these trades are required to be reported.'
According to one of the people familiar with the matter, some banks do voluntarily report the trades, but Mr. Adoboli may have known which wouldn't report because he previously worked in back-office processing for UBS.
The European Commission next month will propose a new framework that governs trading in the European Union. The EU was considering the issue before the UBS case put the issue in the spotlight.
'We are very keen to find out more about the details surrounding the UBS rogue-trader case,' a spokeswoman for the commission said. 'We need to learn all the lessons. In particular, we are keen to find out whether what happened was mainly due to internal management failures and why, or whether, there are also wider regulatory lessons to be learnt.'
In its proposals, the commission plans to address 'the issue of increased transparency requirements, including for exchange-traded funds,' the spokeswoman said. The specifics of any proposed changes to the rules, such as whether confirmations would be required in the case of the UBS trader's alleged unauthorized ETF trades, still are unclear, she said.
The lack of the reporting requirement is one of a number of issues trading firms are examining to better understand gaps in risk measures at UBS.
Traders from other brokers and banks said it is clear that the trader was running a large trading book based on the size of the trading loss. Banks typically monitor gross notional trading amounts to have a better understanding of the total trading value at risk. A large gross notional amount can trigger alarms.
But if a trader crosses his bets for and against stocks, called long and short trades, he can take on large risks while showing a relatively small net trading position.
That is why it is important for banks to monitor the gross notional values of traders' books, rather than the net value, said Terry Smith, chief executive of London broker Tullett Prebon PLC and fund manager Fundsmith.
ps:最近瑞银被魔鬼交易员阿杜伯利拖住了，后者因为未经授权的违规交易导致瑞银亏损了23亿美元。这虽然不足以动摇瑞银根基，但也带来了不少麻烦，同时也暴露了欧洲交易制度的缺失。有兴趣的多读下，发表一下您对层出不穷的金融诈骗案的看法。
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i think it is very very ……tricky
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