A Closer Look at the UBS Rogue Trader and ETFs | ETF Trends

A $2.3 billion loss that was associated with exchange traded funds at UBS has been a media black eye for the $1 trillion business, but the scandal doesn’t seem to involve a problem specific to ETFs.

In September, a UBS “rogue” trader, Kewku Adoboli, exploited  a major loophole that caused the Swiss bank to incur $2.3 billion in losses on false trades. [‘Rogue’ ETF Trader Causes UBS To Lose $2.3 Billion]

The Swiss bank stated that the loss came from speculative trades in various S&P 500, Dax and Eurostoxx index futures over the last three months, reports Emma Dunkley for Citywire.

Traders were expected to maintain hedge positions on the futures. In Adoboli’s case, he created “fictitious,” forward settling, cash ETF positions that looked as if they offset the futures positions, which left the positions unhedged and violated UBS’s risk limits by concealing the size of the index futures trades.

Under European regulations, brokers trading equities and equity-like instruments with other brokers are not required to send a confirmation for this type of trade. Additionally, forward settlements may not be confirmed by either the back office or the couterparty’s back office for the duration of the trade, which was for two months in the UBS scenario.

“For example, a fake ETF trade to another broker in this sense would mean nothing is discovered for two months. In the meantime, he would book his trade into the system to show he was hedging his position,” according to one industry expert.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.