UBS Case Highlights Need For Rigid Rogue Trading Controls

Terry Flanagan

As the case of the ex-UBS rogue trader continues in London, Kweku Adoboli’s alleged dealings bring into focus the need to have rigid risk processes in place.

Adoboli is accused of causing the largest unauthorized loss in British trading history following revelations of a $2.25 billion loss at Switzerland’s largest bank a year ago. The 32-year-old has denied the charges.

It is not the first such case to rock Europe’s shores. In 2008, Jérôme Kerviel, a trader at Societe Generale, was accused of losing €4.9 billion of the French bank’s money. He was convicted in 2010 for breach of trust, forgery and unauthorized use of the bank’s computers but has since appealed the decision. Societe Generale characterizes Kerviel as a rogue trader and claims Kerviel worked these trades alone and without its authorization.

And this summer, bulge bracket U.S bank JPMorgan Chase announced that its losses had swollen to $5.8 billion following an earlier trading fiasco at its London office. The losses were linked to a London-based trader nicknamed the ‘London Whale’.

“In the last few years we have seen money laundering, market manipulation and rogue trading hit the headlines, which has done nothing to rectify the negative perception of the banking industry,” Fred Boulier, director of compliance for Nice Actimize Europe, a provider of financial crime, risk and compliance software, told Markets Media.

“Unfortunately, it doesn’t look like this has been the last of this and the industry needs to think bigger about how it can overcome and protect against such activity.

“These scandals will continue to occur if banks do not have the right systems in place to be able to monitor trades and prevent rogue trading. What has emerged from both the Kerviel and UBS cases is though the information is available, without a holistic approach across all silos of risks within a financial institution, the key indicators of rogue trading cannot be joined up to identify suspicious activity.

“Banks are used to managing all sorts of risks but one of the risks that is difficult to manage is the rogue trading risk. Market risk is here to tell you how much money you as a financial institution are likely to lose if adverse market conditions happen—for example, a market that goes up or down or experiences high volatility. What are your exposures to a number of things that may happen in the market? You can only have a good picture of this if the trade information that traders put in their books is genuine. Rogue trading controls are primarily here to detect fictitious trades, for instance.”

Another form of risk is technology risk resulting from a firm’s possibly outdated trading infrastructure. Trading technology today involves highly automated decision making, complex inter-connectedness and high data rates.

Where trading behavior becomes anomalous or unexpected, limits breached, or any of a wide variety of metrics triggered, additional barriers and check-points can be put in place to help manage this type of risk.

“Trade technology and operational risk must be managed to avoid financial and reputational damage,” said Donal Byrne chief executive of Corvil.

Corvil, a provider of monitoring and risk mitigation solutions for electronic trading firms, has a new offering called CorvilNet Solution, which it says can help firms strengthen their risk management processes.

“Our customers need a complete overview and must understand what is happening throughout their trading infrastructure. Corvil now offer comprehensive trade monitoring, business level visibility tools and a consulting service to work hand in hand with each customer. This delivers the complete and comprehensive overview required in today’s trading environment.”

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