Rogue traders will always pose risk to compliance controls, says industry

September 16, 2011

Traders work at their desks in front of the DAX indexBy Martin Coyle and Alex Robson

LONDON/NEW YORK, Sept. 16 (Thomson Reuters Accelus) – The $2 billion rogue trading incident at UBS demonstrates that determined individuals will always be able to circumvent internal systems and controls despite the recent regulatory scrutiny on this area, industry officials said. The case also highlighted the need for banks to think about their reward structures, they added.

UBS yesterday confirmed that 31-year-old London-based trader Kweku Adoboli had lost the bank around $2 billion in unauthorised deals. The director of exchange-traded funds (ETFs) and “Delta 1″ was arrested on suspicion of fraud at his desk by City of London Police at 3:30am.

Brian McDonnell, a partner at Olswang, said that the Financial Services Authority (FSA) would undoubtedly turn to possible systems and controls issues at the Swiss bank and said that there had been plenty of recent regulatory activity in this area. He pointed out that even the most diligent of firms could be at risk from a lone rogue individual.

He told Thomson Reuters: “If the controls are in place and the person is being properly managed and supervised then a firm has done all it can be expected to do. Even the best-managed firm which has adhered to the FSA’s recommendations on systems and controls is still going to be potentially susceptible to determined rogue elements. Unless you completely hamstring a trader, they will operate with some discretion and, of course, that trust can be abused.”

Other City sources were less charitable and pointed out that the rogue trading could have been aided by weaknesses in the bank’s systems.

Lisa Osofsky, a regulatory adviser at risk consultancy Control Risks, said that “compliance cultures” were often missing on trading floors, especially with the huge incentives on offer for star performers. Osofsky, a former money laundering reporting officer at Goldman Sachs, said that there needed to be a “corporate will” to manage risky high performers. “This doesn’t happen overnight. So who was asleep at the switch or more likely who was patting him on the back?” she asked.


One senior City professional cautioned: “There is little fact around at the moment, but lots of conjecture.

“Still, the numbers are high and there will be major question marks over the lack of control and management supervision in the equities division at UBS,” he said.

The fact that the rogue trading was likely to push UBS into another quarterly loss when the bank was trying to get its head back above water would simply make it worse for an already troubled institution, he added.

Simon Morris, a partner at law firm CMS Cameron McKenna, dispelled the notion that rogue traders worked alone. “No rogue trader works in a vacuum, and UBS’s management must have taken its eye off the ball to allow a trader to operate on this scale without sufficient supervision and without the systems to monitor his trades. They, and the shareholders, must now pay the bill for this laxness.”

Osofsky said the case demonstrated that banks needed to vet the individuals they took on in high-risk positions very carefully. She said that banks could sometimes be short-sighted about those they hired and told Thomson Reuters: “As a firm you are only as good as the people you hire so you need to ensure people are properly vetted before they are entrusted with client money.”

McDonnell expressed surprise that the trader had apparently managed to rack up such losses with ETFs. He said that the funds were not regarded as the highest risk and were seen as fairly “vanilla”. “It goes to show that maybe ETFs have become slightly higher-risk investments themselves,” he said.

Osofsky questioned what lessons had been learnt from previous rogue trading cases and pointed out that compliance officers were often not taken as seriously as they should be in large banks. She suggested that a change of approach might be needed. “You need to talk about changing behaviour, not only to reward money making but also to reward good compliance measures and people who abide by them,” she said.

One industry official said that the case highlighted that banks needed preventative as well as detective controls and also showed the need for desk/trader oversight and limit monitoring. She said that the timing was especially unfortunate following the publication earlier this week of ring-fence recommendations by the Independent Commission on Banking (ICB), chaired by Sir John Vickers. There was also an issue about whether the trader’s conduct was deliberate, a mistake or market abuse.

The scandal is a blow to Maureen Miskovic, who took over as chief risk officer at UBS at the start of the year. She arrived from State Street, the U.S.-based financial services group, with a strong reputation and has shaken up risk management at the bank, according to one industry source.

(Additional reporting by Kirstin Ridley and Steve Slater of Reuters)

(This article was produced by the Compliance Complete service of Thomson Reuters Accelus.  Compliance Complete ( ions/regulatory-intelligence/compliance- complete/) provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 230 regulators and exchanges.)


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