Remember UBS’ $2 Billion Trading Loss? Make That $2.3 Billion

Last week, UBS announced that it had discovered unauthorized trading in its Investment Bank and estimated that it was going to suffer a loss of $2 billion. According to UBS, the trading was conducted by a trader in its Global Synthetic Equity business in London. The trader in question has been charged by UK authorities with fraud by abuse of position.

UBS is now out with another statement. According to the bank, the loss arising from this trading is $2.3 billion. UBS says that the loss resulted from “unauthorized speculative trading” in various S&P 500, DAX, and EuroStoxx index futures over the last three months. UBS says that the positions taken were “within the normal business flow of a large global equity trading house as part of a properly hedged portfolio.” However, according to UBS, “the true magnitude of the risk exposure was distorted because the positions had been offset in our systems with fictitious, forward-settling, cash ETF positions, allegedly executed by the trader.” These “fictitious trades,” UBS asserts, “concealed the fact that the index futures trades violated UBS's risk limits.”

UBS adds that following inquiries directed to him by UBS control functions that were reviewing his positions, the trader revealed his unauthorized activity on September 14, 2011.

UBS's board of directors has set up a special committee to conduct an independent investigation of the unauthorized trading activities and their relation to the control environment. The committee will be chaired by David Sidwell, the senior independent director, and will report to the board of directors. The other members of the committee are Ann Godbehere and Joseph Yam. 

UBS will have a great deal to explain and there undoubtedly will be significant changes, to personnel and practices, before the dust settles on this episode.