UBS $2 billion rogue trade suspect held in London

[Jan Klimkowski]

Fixed the headline:

UBS $2 billion perfect patsy held in London

Here's some more of the official story as channelled through the Guardian:

A 31-year old man Kweku Adoboli has been arrested by City of London Police on suspicion of fraud in connection with an alleged rogue trading incident that has cost Swiss bank UBS around $2bn (£1.3bn).

The Zurich-based bank uncovered the incident in the past 24 hours. Shares in UBS plunged nearly 10% after it revealed the loss, which could push the bank into the red for the current financial quarter.

The City of London Police confirmed they had arrested a 31-year old man at 3.30am in central London on "suspicion of fraud by abuse of position". The police did not identify the individual who remains in custody, but sources say he is Adoboli. The force has begun an investigation.

The Financial Services Authority, the City regulator, is understood to have been informed. People wanting to work in the City often need to be registered with the FSA, and Adoboli's entry shows he has been on the FSA's register since 2006 at UBS.

The bank would not comment but Adoboli is understood to work in its equity division and on a trading desk called Delta One that was involved with its exchange traded funds (ETF) business. ETFs are complex financial instruments that comprise a basket of investments intended to mimic a market's movements while Delta One traders try to make huge profits on tiny differences between prices.

The Serious Fraud Office may yet become involved after it said it was "seeking discussions" with the bank, the City of London Police and the FSA about how to proceed if fraud needed to be investigated. The SFO had already issued a warning about the "inherent dangers" of ETFs because of their complexity.

It is understood that the entire trading desk, including Adoboli's supervisor John Hughes, has been sent home while the investigation continues.

Louise Cooper, analyst at BGC Partners, said the losses are rumoured to relate to a Swiss franc trade that went wrong after the Swiss National Bank intervened to lower the currency. On 6 September, SNB warned that it would no longer allow one Swiss franc to be worth more than €0.83 equivalent to SFr1.20 to the euro.

"The Swiss currency moved by 8% straight away which is a huge move for FX [foreign exchange] markets. Probably a good guess as to where the loss came from, but at the moment we do not know," she said.

It was not clear, though, whether this was the explanation for what might have gone wrong and UBS did not deviate from a brief statement in which it said it was still trying to get to the bottom of the matter.

On the third anniversary of the collapse of Lehman Brothers, the Swiss bank said: "UBS has discovered a loss due to unauthorised trading by a trader in its investment bank. The matter is still being investigated, but UBS's current estimate of the loss on the trades is in the range of $2bn. It is possible that this could lead UBS to report a loss for the third quarter of 2011."

It added that "no client positions were affected".

I note that the fingered "rogue trader" is a black man.

I also note that the story is related the revaluation of the Swiss Franc. That event is covered in post #586 here.

Note Denninger's comments there:

Swiss Central Bank Detonates FX Traders

In what may well be the single largest one-day move in the FX markets ever (I can't find a larger one among "major" currencies with material representation in FX) the Swiss National Bank decided to "peg" (via printing) the CHF to 1.2 Euro.

The result was an essentially-instantaneous move in the CHF against everything of almost 10%.

(Chart at url)

For the uninitiated FX trades are often done with rather extreme amounts of leverage. This sort of move has a very high probability of utterly destroying many traders - anyone on the wrong side of it, basically.

So, UBS was caught highly exposed and highly levered when the Swiss National Bank decided to revalue their currency by 10%.

$2 billion pissed away on the roulette table.

The corporate suits have a brainwave: Gee let's blame a rogue trader.....