UBS rogue trader losses highlight risk of relying on IT

Compliance and monitoring systems are no substitute for human judgement

Storm-tossed Swiss bank UBS has confirmed that it was the failures of its control systems that allowed a rogue trader to rack up billions in undetected losses.

The bank confirmed in a submission to the US Securities and Exchange Commission (SEC) that it had identified two “control deficiencies” enabling one of its traders to rack up losses of £1.3bn.

One of the deficiencies was with UBS systems, which monitors trades with settlement dates greater than 15 days and which was not operating properly, while the inter-desk reconciliation process did not spot the rogue activity either.

“We have taken and are taking measures to address these control deficiencies,” UBS said in its statement.

UBS had previously acknowledged that the trader had been able to conceal the true magnitude of risk he was taking in trades using fictitious trades.

UBS was forced to acknowledge the causes of failure in its early warning systems because it is listed on US stock exchanges and therefore subject to Sarbanes-Oxley regulations.

But the problems at UBS highlight the dangers of firms becoming over-reliant on IT systems to oversee compliance efforts, said Dale Vile of analyst firm Freeform Dynamics.

“There are still many situations where the human brain will spot patterns and anomalies that even the most sophisticated rules-based computer system will miss, and others where human value judgements are necessary to ensure that suspect or borderline conclusions are not acted upon by a system automatically,” he said.

Meanwhile, the UBS statement comes just days after the US Financial Industry Regulatory Authority (FINRA) fined UBS Securities $12m (£7.5m) for failing to properly supervise short sales of securities. In settling the case, UBS Securities neither admitted nor denied the charges, but accepted FINRA's findings.

UBS said it has conducted a review of its systems and monitoring procedures to ensure compliance with FINRA's regulations.