Ring-fencing rogue traders

by Stubborn Mule on 25 September 2011 · 6 comments

Kweku Adoboli managed to cost UBS over $2 billion with his rogue trading, and has now cost chief executive Oswald Grübel his job. While this time the buck stopped at the top, it is more than can be said for many previous rogue trading cases. Grübel was called out of retirement to take the helm of UBS as it faced the global financial crisis, so perhaps a return to retirement was an easier choice than it would have been for the chief executives of Société Générale, NAB*, Allied Irish and other past victims of rogue traders.

But what has surprised me about this latest rogue trading incident is reactions like this one from the Economist:

For UBS and its shareholders, the immediate questions should be why it was still vulnerable to this sort of alleged manipulation more than three years after Mr Kerviel’s [the Société Générale rogue trader] loss.

Of course banks are aware of the risk of rogue trading, but it does not mean that protecting themselves against this risk is a simple matter. Trading businesses are complex, with many interconnected computer systems, some old, some new, most dealing with transactions in real time. It is a case of asymmetric warfare: the bank has to defend itself against every possible attack, but the rogue trader only has to find a single point of weakness. The UBS loss may be another reminder for banks of just how much an insider can cost them, but I am confident that there will be another spectacular rogue trading case within the next five years.

Little wonder then that Sir John Vickers, in his report on UK banking, has recommended that banks should “ring-fence” their investment banking operations (including financial markets trading businesses) from their retail and commercial banking arms. The idea is that, while governments will always want to protect the financial system that is so central to their economy, tax-payers should not end up on the hook for losses arising from risky investment banking activity.

Banking regulators around the world have been intently pursuing ideas like this over the last couple of years and the Adoboli case will only add to their determination to impose some form of “recovery and resolution” framework on banks. Before this work is complete, I would not be too surprised if UBS have spun off their investment banking arm. It is becoming all a bit much for Swiss shareholders to cope with.

* UPDATE: My memory served me poorly: the CEO of NAB, Frank Cicutto, did in fact resign after their FX trading fraud.

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{ 6 comments… read them below or add one }

1 Magpie September 26, 2011 at 10:22 am

Hey Stubborn,

NAB!?

2 Stubborn Mule September 26, 2011 at 2:13 pm

NAB had four rogue currency traders back in 2004 who lost them $360m.

3 Magpie September 26, 2011 at 6:12 pm

I’ll be damned!

4 Magpie September 28, 2011 at 8:42 pm

You’re right. I had not heard that story before, but here it is:

NAB rogue traders jailed
http://www.abc.net.au/worldtoday/content/2006/s1678388.htm

Living and learning…

5 Magpie December 4, 2011 at 2:30 pm

Stubborn,

I forgot to mention it, but three weeks ago there was a Foreign Correspondent episode on this matter.

Perhaps you should have a look at it:

Going Rogue
http://www.abc.net.au/foreign/content/2011/s3367080.htm

6 Stubborn Mule December 5, 2011 at 11:06 am

Missed that…thanks for pointing it out.

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