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royalflush
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Posts: 64
Joined: August 5th, 2008, 8:11 am

What went wrong at UBS?

September 19th, 2011, 6:36 pm

Hi,there is one thing that I realy do not understand. 1. Whenever I do a trade on a listed market like XETRA or EUREX the transaction goes STP into my riskmanagement system. So there is no place for fraud as all processes are automated.2. Whenever I do a trade OTC I need to book it manually into my risk management system. My backoffice reconciles my bookings against confirmations from external counterparties. 2a. If the external confirmation existst we just need to make sure that the terms are 100% identical and that's it. No room for fraud.2b. If the external confirmation does not existst my backoffice will come to me and ask for contactpersons at my counterparties place. If I do not deliver asap they push the alert button. So checking this may not take more than 2 or 3 days. What went wrong at UBS? I don't get it. This is so annoying as this stupidty damages the reputation of all traders and banks.
 
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exCBOE
Posts: 80
Joined: May 19th, 2010, 9:48 pm

What went wrong at UBS?

September 19th, 2011, 7:57 pm

QuoteOriginally posted by: royalflushHi,there is one thing that I realy do not understand. 1. Whenever I do a trade on a listed market like XETRA or EUREX the transaction goes STP into my riskmanagement system. So there is no place for fraud as all processes are automated.2. Whenever I do a trade OTC I need to book it manually into my risk management system. My backoffice reconciles my bookings against confirmations from external counterparties. 2a. If the external confirmation existst we just need to make sure that the terms are 100% identical and that's it. No room for fraud.2b. If the external confirmation does not existst my backoffice will come to me and ask for contactpersons at my counterparties place. If I do not deliver asap they push the alert button. So checking this may not take more than 2 or 3 days. What went wrong at UBS? I don't get it. This is so annoying as this stupidty damages the reputation of all traders and banks.There is always a chance it was intentional fraud. You make a compelling case against it being an accident.
 
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Ouyang
Posts: 100
Joined: January 17th, 2002, 5:42 am

What went wrong at UBS?

September 20th, 2011, 12:24 am

QuoteOriginally posted by: exCBOEQuoteOriginally posted by: royalflushHi,there is one thing that I realy do not understand. 1. Whenever I do a trade on a listed market like XETRA or EUREX the transaction goes STP into my riskmanagement system. So there is no place for fraud as all processes are automated.2. Whenever I do a trade OTC I need to book it manually into my risk management system. My backoffice reconciles my bookings against confirmations from external counterparties. 2a. If the external confirmation existst we just need to make sure that the terms are 100% identical and that's it. No room for fraud.2b. If the external confirmation does not existst my backoffice will come to me and ask for contactpersons at my counterparties place. If I do not deliver asap they push the alert button. So checking this may not take more than 2 or 3 days. What went wrong at UBS? I don't get it. This is so annoying as this stupidty damages the reputation of all traders and banks.There is always a chance it was intentional fraud. You make a compelling case against it being an accident.A risk management system safeguards against intentional fraud as much as against accidents. Any risk system that doesn't consider intentional fraud is worthless. Oswald Gruebel says that "if someone acts with criminal energy, then you can't do anything", but it is like saying "if terrorists want to attack us, all we can do is to roll over and die".
 
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royalflush
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Posts: 64
Joined: August 5th, 2008, 8:11 am

What went wrong at UBS?

September 20th, 2011, 6:30 am

I still don't get it. For me there is no chance of acting against my employer unsless someone from the backoffice helps me. So there seems to be a big issue about control procedures.
 
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Hansi
Posts: 3300
Joined: January 25th, 2010, 11:47 am

What went wrong at UBS?

September 20th, 2011, 7:43 am

He used to be back office so he might have had accomplishes or known about loop holes.But honestly no one I know can actually comment on how this could possibly happen, it just doesn't make sense.I thought this was a good post on why it doesn't make sense: http://kiddynamitesworld.com/losing-2b- ... you-think/
 
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royalflush
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Posts: 64
Joined: August 5th, 2008, 8:11 am

What went wrong at UBS?

September 20th, 2011, 8:18 am

Hansi, this is a very good read.
 
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Stutch
Posts: 113
Joined: October 30th, 2006, 10:16 am

What went wrong at UBS?

September 21st, 2011, 8:16 am

2Bn ? Was it 2147483647 + 1 ?
 
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rmax
Posts: 6080
Joined: December 8th, 2005, 9:31 am

What went wrong at UBS?

September 22nd, 2011, 10:45 am

QuoteOriginally posted by: royalflushI still don't get it. For me there is no chance of acting against my employer unsless someone from the backoffice helps me. So there seems to be a big issue about control procedures.Sounds a good place to work or you have undue trust on the controls in place. I have witnessed numerous blow-ups of varying degrees probably something along a Normal Distribution - although have yet to see one that his breached the 1bn mark, but some have got pretty close and have not got the same level of press coverage.
 
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hayes
Posts: 1181
Joined: July 18th, 2008, 11:24 am

What went wrong at UBS?

September 22nd, 2011, 11:04 am

QuoteOriginally posted by: rmaxQuoteOriginally posted by: royalflushI still don't get it. For me there is no chance of acting against my employer unsless someone from the backoffice helps me. So there seems to be a big issue about control procedures.Sounds a good place to work or you have undue trust on the controls in place. I have witnessed numerous blow-ups of varying degrees probably something along a Normal Distribution - although have yet to see one that his breached the 1bn mark, but some have got pretty close and have not got the same level of press coverage.Absolutely agree. I believe the distribution is skewed however, with a certain level of loss being accepted as a cost of doing business. And as UBS et al have taught us, this distribution model has a jump that most of us only hear about and do not experience it personally.
 
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hayes
Posts: 1181
Joined: July 18th, 2008, 11:24 am

What went wrong at UBS?

September 22nd, 2011, 11:25 am

If only to set that cat out among the pigeons.....It seems rather harsh that the junior trader involved is currently in custody, looking at a long sentence and a ruined career, (outside of the lecture/ after-dinner circuit atleast) not to mention that any future earnings will be promptly claimed back by UBS in a civil action for certain.I don't object to a criminal being punished, and a serious criminal being punished severely, however as any punishment is never going to act as a deterent, and as there was no doubt multiple failures across the organisation that allowed him to act accordingly, somebody senior should be taking responsibility for this too.But who?......As a starting point, what about the direct managers who have already resigned, but will no doubt be back working for a tier 2 bank (or a more junior role in a tier 1 bank) by the start of 2012? If as a head trader, I knew that I might go to prison if my guys commit fraud, even if I wasn't a part of it, I'd be spending a lot more time (and budget) on operational projects, so that I could show my employer and the police/ courts that I wasn't criminally negligent.What about the CEOs? This one is more controversial as it is a public/ media pleaser, and frauds will always occur, you can't keep making the top dog responsible everytime, but surely the buck has to stop there in some form?What about operational/ risk/ IT managers? These roles seem immune at the moment, unless they are VERY directly related to the fraud, and often these are the guys with the experience necessary to plug gaps and fix problems quickly. But if they had been successful in their roles, why did their system/ control process fail? This one would definitely put a lot more pressure/ responsibility onto the role, raising exposure/ status and would probably bump up salaries. Who knows, maybe in 5 years time the banking sector would be flooded with clueless grads, desperately trying to get a job in back office even though they have no idea what Ops is all about? (And before you laugh at the idea, there are European countries where grads feel the same way about civil service jobs, they are coverted and prized, available only to the best and brightest).
 
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rmax
Posts: 6080
Joined: December 8th, 2005, 9:31 am

What went wrong at UBS?

September 22nd, 2011, 1:42 pm

Thought provoking post. However as an antithesis:I think we have to be careful of bucketing a whole set of issues that are currently in the industry and trying to find a suitable well paid scapegoat. I think that the issues are that there are a whole gamut of controls that have broken (as mentioned in my prior posts): Trader, Desk Manager, Head of Business, Ops, Op Control, Risk Management, Finance.Those that are long in the tooth enough to remember AIB and John Rusnak will remember that junior people did challenge John, and they were lambasted for "not understanding" his strategy. Similar when Nick Leeson forged a fax to ask for the funding for the roll of his Simex Futures Margin. Yes people should question the motives, and I think that various people should be fired from the firm, but to hold them for criminal misconduct and imply that they were reckless and hence omitting control can only be measured against the man on the Clapham Omnibus - and since the number of "rogue trader" incidents are very high (especially in the Forward side of the business) it seems to me that most people in the same position would have made the same mistake. Don't take this the wrong way - it means that there is some fundamental lack of understanding these departments have in terms of their service to the equity holders - and this should be addressed, but I do not believe that they can be held criminally negligent.In other words: If I kill someone who should get the blame. My parents, my school, my friends or me? I think that it is easy to lay the blame on a whole swathe of people, however if someone is recklessly not obeying the law then the only punishment is that the market should recognise that there is operational risk at the firm, and also in the sector and price accordingly.
 
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LTrain
Posts: 1077
Joined: June 23rd, 2004, 6:42 pm

What went wrong at UBS?

September 22nd, 2011, 8:17 pm

If you really want to commit fraud, join Berkshire and get paid to do it!! Love to see the trade sheets of the employees a week or two before the BoA announcement!
 
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PlasticSaber
Posts: 414
Joined: April 28th, 2007, 8:17 am

What went wrong at UBS?

September 22nd, 2011, 9:23 pm

My working experience is entirely buy-side. So this is yet another mind provoking pure speculation.I agree that it is very difficult to incur $2bn of unauthorised trading loss in a typical trading desk which faces only to the external world. Raising margin and collateral requirement would give away the covered up in a matter of at most few days. But I also notice the alleged rogue traders from all recent cases were transferred from the middle office of the same bank. If the fictitious client trades were internal, everything started to make sense.Say the Rogue Trader X wants to go outright S&P long, he would booked a fictitious trade from an internal desk that someone wanted to buy S&P ETF and "hedge" that with say futures. In the last couple of months, X would lose loads of money and need to post a lot of margin to the exchange. PnL wise, he looks ok because of the fake client trade. Now it is the crucial point, why this won't raise an alarm somewhere else in the bank. My speculation is nowadays many banks manage client money in their asset management arm. Also there are structures know to holds a lot of cash (say SPV structured to follow fixed strategy like CPPI). The cash are already in (although compartmentalised). The actual client may be a pension fund that looks into the report details maybe once a month. I believe the internal control could be a lot weaker in such case. I don't think banks would use two separate and independent settlement teams when we are talking about Bank ABC's Delta One desk facing Bank ABC's Wealth Mgmt division. If throw in some random smoke screen like forward starting trade, it would be even harder to detect.
 
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hayes
Posts: 1181
Joined: July 18th, 2008, 11:24 am

What went wrong at UBS?

September 22nd, 2011, 9:52 pm

QuoteOriginally posted by: rmaxThought provoking post. However as an antithesis:I think we have to be careful of bucketing a whole set of issues that are currently in the industry and trying to find a suitable well paid scapegoat. I think that the issues are that there are a whole gamut of controls that have broken (as mentioned in my prior posts): Trader, Desk Manager, Head of Business, Ops, Op Control, Risk Management, Finance.Those that are long in the tooth enough to remember AIB and John Rusnak will remember that junior people did challenge John, and they were lambasted for "not understanding" his strategy. Similar when Nick Leeson forged a fax to ask for the funding for the roll of his Simex Futures Margin. Yes people should question the motives, and I think that various people should be fired from the firm, but to hold them for criminal misconduct and imply that they were reckless and hence omitting control can only be measured against the man on the Clapham Omnibus - and since the number of "rogue trader" incidents are very high (especially in the Forward side of the business) it seems to me that most people in the same position would have made the same mistake. Don't take this the wrong way - it means that there is some fundamental lack of understanding these departments have in terms of their service to the equity holders - and this should be addressed, but I do not believe that they can be held criminally negligent.In other words: If I kill someone who should get the blame. My parents, my school, my friends or me? I think that it is easy to lay the blame on a whole swathe of people, however if someone is recklessly not obeying the law then the only punishment is that the market should recognise that there is operational risk at the firm, and also in the sector and price accordingly.Very true, I don't want to abdicate responsibility from the individual involved, but if the Desk Head, Ops, risk, Finance et al are not there to prevent fraud, then what are they there for? It seems that we want every function to take part in reducing operational risk, but for only a certain few functions to take responsibility for failures.Personally, I think that to put some 30-something year old guy who manages the control recs on 55k a year in prison would be a bit harsh. He didn't sign up for that role, and was not trained, supported or paid enough to do it properly, let alone identify and fix any existing issues. But if we focused future legislation on operational staff, rather than the CEOs and organisational structure, maybe we'd attract better talent to the risk management side of the business?
 
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rmax
Posts: 6080
Joined: December 8th, 2005, 9:31 am

What went wrong at UBS?

September 23rd, 2011, 11:54 am

Nice diagram of the recent events and the controls that have tried to unsuccessfully mitigate the issues. from finlytics
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