This refers to the report “UBS fined $47.5 million in rogue trading scandal” (November 27). Despite robust internal controls and risk management processes in place, the UBS issue may not be the last of its kind.
First, global banks are paranoid about their global ranking, which is determined by profits generated by them. Banks tend to tap every identified vertical to boost profits by setting stiff incentive-oriented targets. The income generated by Treasury operations is among the highest from different sources for any bank. Thus, traders in Treasury are usually given substantial leeway to trade, and they earn high incentives compared to their counterparts in other verticals. This results in a tendency to overlook some rigidities in the laid-down policies, as seen in the UBS issue. Every trader in the Treasury Hall is assigned specific daylight and overnight open positions and clear stop-loss and take-profit limits to exit from the open position and lock-in the profit or loss. Herein lies the temptation of a trader to violate that line where he or she takes an excessive position and often incurs losses. To cover up the losses, the trader doubles or quadruples his exposure to average out. When the adverse position continues to mount, the trader tries to camouflage the deals and resorts to unauthorised practices, eventually making huge losses.
Second, more often than not, the board and the top executive management are not fully conversant with the sophisticated Treasury operations, particularly in complex derivative products, and have to rely more on the senior and mid-level executives who look after day-to-day operations. This was clearly noticed in the Barings loss caused by Nick Leeson. Third, the top management should have the nose to suspect when excessive profits are being generated and should discreetly enquire through independent sources if those are real. Fortunately, the Treasury of Indian banks deal in plain vanilla products. With the strict oversight of the Reserve Bank of India, there is a clear demarcation among front, back and mid-office structures. As a result, there have not been any noteworthy setbacks for any bank on account of rogue trading. However, instances such as the one relating to UBS do give a signal to banks in India to re-look at their processes.
S Ravindranath Coimbatore
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