The ScandalMidterm Project

1st group簡育昰/ 陳羿君/ 邱宇⾠辰/ 張博能

UBS rogue trading

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AgendaBackground

CommentsSuggestionsImpacts

Scandal’sOrigin & StoryUBS Intro.

Scandal’s

Background

01.

Background

01.

Swiss Bank Corporation

Union Bank of Switzerland

UBS’s history - Union Bank of Switzerland and Swiss Bank of

Corporation are merged in 1998. (UBS Today) - UBS merged Paine Webber in 2000.

Background

01.UBS’s Ranking in the world

- 2009 ~ 2011

Financial Crisis

The  financial  crisis  has  been  daun0ng  for  most  of  the  world’s  banks,  but  UBS’s  behavior  stands  out.  

In  August  2008,  UBS  misled  customers  when  it  sold    them  what  it  described  as  nearly  risk-­‐free  securi0es    even  as  its  execu0ves  knew  the  market  was  collapsing.

AHer  the  market  froze  and  investors  were  unable  to    sell  the  securi0es,  regulators  sued,  and  UBS  agreed  to    repay  $19.4  billion.  

Background

01.

Background

01.

Tax Fraud -­‐ In  2009,  the  Jus0ce  Department  contended  that  UBS  had  conspired  to  enable  17,000  

wealthy  Americans  to  engage  in  tax  fraud.    -­‐ In  return  for  a  deferred  prosecu0on  agreement,  the  bank  agreed  to  pay  a  $781  million  

fine.

Background

01.1. Holocaust assets (1930s–1998) 2. U.S. trade embargoes (2003–2004) 3. Indian stock market crash (2004–2009) 4. U.S. discrimination lawsuits (2001–2005) 5. U.S. tax evasion (2005– ) 6. Rogue trader scandal (2008–2012) 7. Lehman Brothers notes (2007–2013) 8. U.S. municipal bond market rigging (2001–2013) 9. Arms sales and Indian money laundering (2003–2011) 10. Libor benchmark rigging (2005–2012) 11. Currency benchmark rigging (2003– ) 12. U.S. mortgage-backed securities (2004–2015) 13. French tax evasion (2002– ) 14. German tax evasion (2004– ) 15. Belgian tax evasion (2004– ) 16. Timber corruption and Malaysian money laundering (2006– )

Other controversies

Origin

02.

Origin

02.On 15 September 2011, UBS announced a 2 billion dollar loss irregular trading by UBS trader, Kweku Adoboli, trading the delta one product.

In this section, two critical parts of this UBS’s story would be introduced. The first part is about how the scandal occurred. The second part briefly discusses about the Kweku Adoboli’s delta one trading.

Origin

02.

Kweku Adoboli

A trader in the Delta One business. - Global Synthetic Equities Trading Team in London - Design ETF for customers - hedge for potential loss of UBS.

The key person of the scandal

Origin

02. The UBS’s Scandal

Adoboli made the fake trading record to hide his

real deal. He has started to conduct irregularly

since 2008.

On 6 September 2011, Swiss National Bank

announced the lower bound of foreign exchange

rate of Euro against Swiss franc, so Euro soared.

Investments who expected Euro to fall lost a lot,

including Adoboli.

Origin

02. The UBS’s Scandal

UBS lost 2 billion dollar and Adoboli’s

unauthorised trading was found at last.

To be responsible for this scandal, the CEO

of UBS, Oswald Grübel, and the co-heads of

Global Equities at UBS, Francois Gouws and

Yassine Bouhara, resigned.

Finally, Kweku Adoboli was arrested for his

abuse of position and false accounting.

Origin

02. How about delta department ? Delta One products are derivatives expected to have the identical price move of underlying asset at the instantaneously.

For example, A is the derivative of B. If A’s price falls 1% as 1% falling of B, we call A is the Delta One product of B. Thus, the delta one’s product could be hedged through this mechanism.

The reason why the delta one’s products designed by UBS’s traders is popular is that it is easier to use with ETF and with programming trading. Besides, the customers could use less initial capital to trade this product.

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Impact

03.

Impact

03. Shrunk in the market share of UBS

!8.14%

1

Impact

03. The resignation of the executives2

Impact

03.3

Lowered the credit rating of UBS

The credit rating agency including Standard & Poor’s, Moody’s and Fitch Rating, may put its credit rating into downgraded watch list.

“”

Impact

03.3

Date rate observe1998/6/29 Aaa1998/12/11 Aa12001/5/31 Aa220074/20 Aaa2008/4/1 Aa1 *-2008/7/4 Aa2

2009/6/15 Aa2 *-2009/11/18 Aa32011/9/15 Aa3 *-2012/6/21 A22015/3/17 A2 *-

Impact

03.4

Another heavy crush on UBS

Loss US50 billion during financial crisis

➜ bailout from the Swiss government

Suffered allegations ➜ avoiding the taxation raised by US regulators

significant reputation damage+ ➜

Comments & Suggestions

04.

Comments & Suggestions

04. Questions to be thinking about:

What can we learn from rogue traders ?Q1.

Q2.How to prevent such scandals repeating in the future ?

Comments & Suggestions

04. Moral hazard & Operational risk

To sum up, moral hazards arise because the institutions don’t take the full consequences and responsibility of its action.

The key point anyone conceal the losses is that they will be financially compensated for how much money they made for the bank.

- Moral Hazards

A trader at the institutional level have to be honest and have integrity. However, they have the potential to make irreversible financial damage every day.

Comments & Suggestions

04. Moral hazards & Operational risk

The UBS’s story shows that the supervisory functions have failed because of firms’ poorly managed admission, and failing organisation. The ability to track unauthorised and unacceptable trading performance is not happening in real time.

- Operational risks

The operational risks should be considered in their management system. However, it is not easy to track rogue traders’ speculation behaviour if the firms get larger and become more complex.

Comments & Suggestions

04. Lessons & Suggestions

The UBS’s failure of management presents that the banks should establish trading limitation, leverage constraints, and risk parameters. Traders should stay with their money line, draw downs, loss limits, etc.

The financial institutions should ensure the capital should be precisely and properly managed. The IT systems and internal technology should be able to track what is happening in the real time and prevent potential rogue traders from financial disaster.

There is no reason that taxpayers should be responsible for any rogues from the traders, and banks.

Thanks for your attention.