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An article relating to this blog post on Finextra:

UBS trading scandal investigation finds risk systems ignored

Risk systems did pick up suspect activity at UBS related to the recent loss of $2.3 billion through unauthorised trading but the information was not properly acted on, according to an internal investi...


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It's not enough just to have the risk systems turned on

So, now we all know the dirty little secret at the heart of the latest alleged 'rogue trader' scandal at UBS. Risk management was ignored. Well, knock me down with a slide ruler. 

Now, I wrote a rather snarky blog when this scandal broke asking whether the lights were even turned on in the UBS trading floor, never mind the VaR calculations, risk limits of counterparty risk models. But what has happened at UBS is not exclusive to Swiss banks that carter to rich, private clients. It is endemic (systemic?) throughout the investment banking world. 

Risk management, which is so ingrained, in fact part of the business, in other financial services businesses - insurance and retail banking, for example - is regarded as an annoying jobsworth gnat, best ignored and disregarded in investment banking.

A few years ago I had a conversation with a senior Lehman Brothers risk manager two weeks before it all went tits up. Looking back the conversation was chilling. Risk managers at the former investment banks rarely ventured onto the trading floor; in fact their offices weren't even in the same building as the traders. As for educating the entire firm on its over-all risk culture and appetite? A memo was sent around once a year.

For years investment banks' risk management departments existed soley as an office to produce reports so the bank could show the FSAs and SECs of this world that 'See! We have a strong and robust risk culture! Now, when can I show you the exit?'

A hospital can have a bank of sinks, running water and anticeptic gel, but if the doctors and nurses don't use them, patients will still get sick. 

Yes, the financial crisis claimed Lehman Brothers, HBOS, Merrill Lynch and shifted RBS to (supposedly) public control - but it also brought us the bank bailout. Bailout money that banks (we're constantly reminded) have mostly paid back, with interest. So everything's fine now. Trading floors can go back to what they do best and risk management can go back to being window dressing for ineffectual government regulators. 

After all, banks need to make money again, and all risk management does is wander around with clipboards and spreadsheets stopping profit-making capitalism with their annoying talk of 'risk limits, appetites and capital adequacy'.

What losers, right? Why don't you ask UBS. Go ahead, ask Francois Gouws and Yassine Bouhara. The heads of UBS' equities desk didn't ignore the bank's internal risk controls because they are evil, greedy capitalist pigs. They ignored the systems and controls because they could. 

This needs to stop and this needs to stop now. And this is how you do it. 

  • Put the CRO on the board of the bank and have it mean something.
  • Put the offices of the risk managers, whether they are working on market, credit or operational, on or next to the trading floor. 
  • Have the risk managers on the trading floor, in constant conversation with the head traders - at all times.
  • Make risk management a high profile and equally renumerated position at the bank. 
  • Give senior risk manager the right and the authority to enforce trading limits, without going through the head trader - either manually or through technical means.
  • Make all traders spend some work experience working in the risk department (now I know with credit risk that would be difficult, but work on it) and vice versa.
  • Don't set up a Risk Culture (and this has to start at the top) where risk managers are considered lowly, jobsworths, itching to say 'no' to any innovative investment scheme. 
  • Make risk part of the business - a real part

I once had a chat with another senior risk manager (I know several) at a major Asian bank who said he constantly has to say to the trading floor - 'ask me for as much as you want, push your limits - don't be afraid - the numbers usually add up - I may surprise you.'

Well, the numbers didn't add up at UBS and that is a $2.3 billion fuck up. 

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Elizabeth Lumley

Elizabeth Lumley

Global FinTech Commentator

Girl, Disrupted

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This post is from a series of posts in the group:

Financial Risk Management

This network brings together professionals involved in the oversight and management of their company's financial risks and exposures as well as solution vendors, in order to discuss risk issues including interest rate risk, foreign exchange risk and commodity price risk, among others.


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