A UBS AG (NYSE: UBS) “rogue” trader exploited a major loophole in trading exchange traded funds (ETFs) that caused the Swiss bank to incur huge losses on fake positions.
In Europe, a loophole may have allowed one UBS trader to write $2.3 billion in false trades as banks on the the other side of the trade weren’t required to confirm the transaction, reports Andrew Peaple for The Wall Street Journal.
UBS stated that the lone trader undertook “unauthorized speculative trading in various S&P 500, DAX and EuroStoxx index futures over the last three months” through fictitious hedging positions in the bank’s internal systems, reports Emma Thomasson for Reuters.
Over 70% of ETF trades are done “over-the-counter” in Europe, and European banks are not required to confirm ETF Trades done in this manner. Because market participants don’t need to report these trades to a regulator, European regulators do not know who holds what in the ETF market.