Rogue trader: How UBS systems failed to stop a £1.3bn loss

Proper risk monitoring and trade limitation tools, backed up with strong management supervision, are the only ways to stop rogue trading, experts say after UBS derivatives trader Kweku Adoboli ran up a $2 billion loss.

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Proper risk monitoring and trade limitation tools, backed up with strong management supervision, are the only ways to stop rogue trading, experts say after UBS derivatives trader Kweku Adoboli ran up a $2 billion (£1.26 billion) loss.

UBS’ risk management IT systems may have entirely failed to identify the fast-worsening financial position that led to Adoboli running up the loss, analysts say. However, potentially serious management problems have also emerged after it was reported that the trader had been concerned about his position for a week, posting his concerns on Facebook and apparently highlighting the problem to managers.

Oswald Grubel, the chief executive at UBS, has made public his fight to restore the bank’s reputation following the financial crisis, and had insisted it was implementing strong risk management.

UBS declined to explain to ComputerworldUK.com what controls it had in place, and if Adoboli – whose many friends have come to the defence of his character – had circumvented these controls. A police investigation continues.

Analysts say it is vital, and technologically straightforward, to implement the right systems to help prevent rogue trading. They express surprise that a bank as large and advanced as UBS had failed to stop the problem.

Matthew Clay, a senior research analyst at IDC Financial Insights, with expertise in capital markets and risk, says: “There are a whole range of ways in which those trades should have been caught.

“Most importantly, trader surveillance systems should have highlighted unusual activity and poor financial positions early on, and limit-management software should have stopped him when he hit a pre-defined bad risk profile. Managers then need to act decisively.”

Rik Turner, senior analyst at Ovum, agrees that efforts to catch rogue traders required a mix of management and the right tools – and neither would work in isolation.

“Just like security for your house, you can fit all the locks, have a big ugly guard dog, alarms and electric fences, but if someone cuts your electricity, shoots your dog and smashes a couple of windows, you’re still gonna get burgled.”

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