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20th September 2011

UBS rogue trading - story so far

Since last Thursday's terse announcement that a rogue trader had cost the bank around $2bn we now know the following facts:

- 1 The trader's name is Kweku Adoboli and he worked on the Delta One trading Desk. He was charged on Friday with fraud and false accounting. He made no plea at the hearing. After UBS control departments questioned Adoboli on 14th September he went home and then emailed a confession to his manager. The bank then informed the regulators, police and the market on the 15th before market open. Adoboli's manger resigned. Most of the losses arose in the last three months though some unhedged transactions date back to 2008. Adoboli is said by the bank to have made up false hedge transactions. It is understood that the Swiss Central bank's recent robust action to devalue the Swiss Frank which led to a jump in Swiss equity prices revealed major losses in the positions Adoboli had taken and led to the discoveries.

- 2 Delta One is a supposed low risk unit trading on exchange-traded funds, equity indexes, equity or dividend swaps. UBS said in its most recent statement "The positions taken were within the normal business flow of a large global equity trading house". The main purpose of Delta One units is to support customer positions and again for the bank to have lost this amount The fact that UBS could lose $2.3bn (the new estimate) on positions of $10bn and no customer positions affected would appear highly unusual, even without the proper hedges in place. A part of the investigations will be likely to ask whether those around the trader did, or should have known, that abnormal and high risk were occurring, irrespective as to whether they were thought hedged or not. UBS also gave assurances in 2007 following proprietary trading losses as to the significant cutting back of such activities.

- 3 Jérôme Kerviel, the rogue trader who cost Société Générale $6.8bn in 2008 also worked in a Delta One unit. Adoboli's rogue trading was supposed to have started in 2008, with the Société Générale incident fresh in everyone's mind which were covered up by fraudulent hedges, never properly investigated. In another parallel with Kerviel he is also understood to have worked in the mid or back-office previously, hence new the controls in place.

- 4 In what would appear to be contradictory statements Oswald Grübel, UBS Chief Executive both said that "the buck stops here" and told Swiss Sunday newspapers that he had no plans to resign. Grübel is a former trader.

- 5 Multiple parallel investigations are now occurring. UBS trading occurs in the UK both through a locally incorporated subsidiary and through a branch of the Swiss Bank so both the UK FSA and the Swiss FINMA are jointly investigating. The two regulators have also appointed Deloitte to carry out a separate investigation into the circumstances. UBS established a special committee "to conduct an independent investigation of the unauthorized trading activities and their relation to the control environment". David Sidwell, the Senior Independent Director, is chairman with Ann Godbehere and Joseph Yam the other members. The police are also conducting their own enquiries.