tuesday, 27 november of 2012

Regulators fine, place constraints on UBS

$50 million fine

Regulators fine, place constraints on UBS

Less than a week after a former employee was convicted in a $2.3 billion trading fraud, UBS AG was slapped with a nearly $50 million fine by British authorities, and Swiss regulators announced restrictive measures, including a ban on investment-banking acquisitions by the firm.

Britain's Financial Services Authority said Monday that it fined the Zurich-based bank £29.7 million ($47.6 million) over the 2011 rogue-trading incident. The fine, which ranks among the largest ever imposed by the U.K. regulator, had been expected.

Separately, Finma, the Swiss equivalent of the British banking regulator, unveiled a number of measures aimed at preventing UBS from suffering such a punishing failure in the future, including a prohibition on new business initiatives and a cap on risks that the division can take. Finma, which doesn't have the power to impose fines, will appoint a third party to supervise implementation of the measures and an audit firm to review whether they are effective.

The regulatory actions will enable UBS to largely put behind one of the most troubling episodes in its history, one which led to the resignation of its chief executive and likely hastened a drastic reshaping of the bank announced last month.

The sanctions stem from a $2.3 billion unauthorized trading loss UBS disclosed in September of last year caused by Kweku Adoboli, a trader on one of the equity desks at its large securities operation in London. The 32-year-old last week was convicted of two counts of fraud in a London court and sentenced to seven years, although he isn't expected to serve the entire sentence in prison. He was found not guilty on four counts of false accounting.

The two-month trial shed an uncomfortable light on a system of risk controls at UBS that gave a relatively inexperienced trader the leeway to rack up the largest trading loss in U.K. banking history. And his loss followed a much bigger one the firm suffered a few years earlier, during the height of the global financial crisis, that precipitated a bailout by the Swiss government.

The Alpine country's largest bank had "serious deficiencies" in the internal controls of its investment bank, Finma said in a statement. UBS failed to recognize warnings triggered by Mr. Adoboli's desk and "sent out misleading signals by awarding pay increases and bonuses to a trader who had clearly and repeatedly breached compliance rules."

The Swiss regulator noted that UBS has, since the discovery of the trading loss, introduced a large number of measures to strengthen its risk management and control capabilities.

UBS said it cooperated fully with the regulators' investigations, accepts their findings and the penalties incurred, and is promoting a "stronger risk-control culture."

"We are pleased this chapter has been concluded and that the regulators have acknowledged the steps we have taken since this incident," UBS said Monday.

The bank already was moving toward the direction Finma pointed. It is in the process of eliminating a big chunk of the investment bank's fixed-income division in an effort to reduce risk and wasn't expected by analysts to make any big acquisition anytime soon. UBS also is proscribed from embarking on new business initiatives without Finma's approval, but given the restructuring, few analysts expected such moves in the near term.

Still, the acquisition ban—reminiscent of one slapped by U.S. regulators on Citigroup Inc. for a time last decade following a series of missteps at the U.S. bank—is an embarrassment for UBS. It could ultimately prove constraining for a firm run by an investment banker. UBS brought in former Merrill Lynch banker Sergio Ermotti to replace Oswald Grübel, who stepped down in the wake of the rogue-trading loss.

Finma also said it would consider "whether UBS must raise capital backing for its operational risks." So-called operational risks include those stemming from a fraud like Mr. Adoboli's. Even if UBS is forced to set aside more capital than it already has to cover such risk, analysts expect it to be easily able to cover the amount called for with internal resources.

A number of the restrictions were put in place soon after the recent loss surfaced, but weren't disclosed until now. It is unclear when the open-ended restrictions will be lifted.

Switzerland was forced to bail out UBS after it lost some $50 billion on credit bets in the early days of the financial crisis. UBS and Credit Suisse Group AG are now subject to capital requirements that are among the tightest in the world. UBS is now pinning much of its hopes for the future on its sprawling wealth-management division, which together with its asset-management arm oversees some $2 trillion of assets.

(Published by WSJ - November 26, 2012)

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