Call for tighter controls after rogue trader costs UBS $2bn

SWISS POLITICIANS have called for further banking restrictions after an admission from banking giant UBS that a rogue trader had cost it $2 billion (€1.45bn).

Switzerland’s largest financial institution reported yesterday that it was facing a loss in the third quarter as a result of what it described as “unauthorised trading”. No client money was involved, it said in a statement.

The trades were discovered on Wednesday afternoon, prompting police in London to arrest a man identified in reports as Kweku Adoboli (31), a trader with UBS’s London-based exchanged traded funds business.

Police confirmed they had arrested a man on “suspicion of fraud by abuse of position”. Mr Adoboli, a director on the Swiss group’s little-known “Delta One” derivatives desk, was being held at Bishopsgate police station after he was arrested at 3.30am.

The trading could be the third largest such fraud in banking history, after a 2008 incident cost Société Générale €4.9 billion and a $2.6 billion loss at Sumitomo in 1996.

Mr Adoboli was reportedly a trader in the same complex derivatives field as Société Générale rogue trader Jerome Kerviel.

“It’s the biggest we’ve ever seen at a Swiss bank,” said a spokesperson for the Swiss banking regulator Finma.

“We understand that you have already had to contend with unfavourable, volatile markets for some time now,” Oswald Grübel, UBS’s chief executive, said in a memo to employees. “While the news is distressing, it will not change the fundamental strength of our firm.”

Shares fell nearly 10 per cent on the news.

Once a pillar of Swiss financial stability, the reputation of UBS has taken a severe beating since it ran up €50 billion losses in the US subprime crisis, prompting a state bailout. Before news the bank’s shares had lost 85 per cent of their value in the last five years, forcing drastic cost-cutting measures and 3,500 job losses.

The revelation came as the Swiss parliament was scheduled to debate tougher bank supervision laws, forcing domestic banks to cut risk and maintain capital reserves worth 19 per cent of their assets – almost double the level in the EU. “This just shows that investment banking is a high-risk area,” said Caspar Baader of the Swiss People’s Party (SVP).

“It’s important that we separate clearly systemically important functions from the rest of the banking business.”

Marianne Binder of the Christian Democrats said it proved the case for higher capital requirements.

“Apparently security systems can fail, again and again.”

The revelation that a trader in “Delta One”, an area of derivative trading activity that is one of the only remaining ways for banks to take bets with their own money, could cause such a catastrophic loss has prompted calls for fresh restrictions on investment banks.

– Additional reporting: The Financial Times