The Bankwatch

Tracking the consumer evolution of financial services

The argument for ringfencing just gained another boost from Adoboli loss at UBS

It is simply delightful to read about the UBS loss today.  If you read this article by Tett at the FT you will be hard placed to understand how Mr Adoboli did anything illegal.

In Europe, for example, so-called “synthetic” ETFs, or packages of derivatives, have become very hot and now account for almost half of all ETFs.

I say delightful, because not only have no lessons been learned since 2008, things have in fact become worse.  The combination of the now “Delta One” derivatives desks, where Mr Adoboli worked at UBS allows derivatives based on ETF’s.  These are 100% synthetic investments that act kind of like indexes to track assets, other indexes or anything the traders decide to concoct.

Tett wrote this piece in May (emphasis mine) highlighting the risks already identified in the rapidly growing ETF market.

And even if investors are wise enough to understand the risks of individual ETFs, the bigger structural impact is not well understood. The FSB, for example, fears that liquidity mismatches and poor collateral practices could create unpleasant markets jolts in a crisis. It also notes there are potential conflicts of interest because of “the dual role of some banks as ETF provider and derivative counterparty.” And there is another, more basic concern: precisely because the market has exploded with such stunning speed, it may be changing flows in unpredictable ways.

So here we have a 4 year employee able to trade these products and while we do not know all the facts, there are rumours that it involved Swiss francs and judging by his Sept 6th Facebook comment requiring a ‘miracle’ it could have involved the Swiss Central banks support for the franc catching him out.  The loss he incurred equates to 4% of UBS capital.

There is a fine line between activities of the employee and those of the organisation that permits such activities.  Many folks online are already speculating that he is a fall guy for poor risk monitoring practices at UBS.  This is not the first time for them.  They had terrible losses on CDO’s in 2007.

The argument for ring fencing just got stronger.  This won’t be the last such loss whether attributed to an employee or not.

Written by Colin Henderson

September 15, 2011 at 23:07

Posted in Uncategorized

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