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As FINRA Targets UBS, What's to Become of the Swiss Bank?


It's almost unfortunate to see FINRA initially target a bank like UBS rather than another institution that has not been nearly as hurt in the recent past.

UBS (UBS) is not getting a break at all. In the last few months, UBS revealed that a rogue trader lost the bank over $2 billion and its former CEO resigned unexpectedly. Recently, UBS added another loss to its books. FINRA accused the Swiss bank of failing to oversee short trades in the last five years. The question is, are the fines warranted?

FINRA accused UBS of improperly supervising millions of short orders. More specifically, FINRA claims that UBS' traders failed to make sure that enough shares were even available to short whenever initiating positions for its clients. However, based on UBS' performance before the financial crisis, it does not appear to have affected its clients to a serious extent.

It almost seems like US financial regulatory agencies are attempting to wring banks for every penny they have, regardless of how minuscule the offense is. Apparently, FINRA will be targeting other banks as well, but again, is it really warranted? While major investment banks took advantage of market opportunities during the 2000's, many of them started to overlook certain details in exchange for booming business.

To be fair, one can argue that UBS' indiscretion and lack of internal compliance is exactly what helped perpetuate Kewku Adobolu's trading losses, and that is very true. If traders and risk managers kept track of the trades that they made properly, they may have noticed that their books were rapidly shrinking and losing money.

Another disturbing detail that was revealed by FINRA's investigations is that UBS traders sometimes incorrectly marked their trades. For example, they would mark long trades as short, and vice versa. This type of error can be extremely detrimental, especially considering that institutional trading typically involves blocks of thousands to millions of shares per trade. If someone accidentally wrote $5 million dollars of a stock long when it was actually short, and then hedged the stock with corresponding put options, that would magnify the bank's exposure. And that is a very plain strategy. Many times, an institution will use complex hedging strategies which could be completely misguided if the initial trade was improperly marked down.

It is almost certain that other investment banks played the game similarly. UBS is definitely not the only institution to have given lenience to compliance just to gain more flow trading fees or to make more money off proprietary bets. It is almost unfortunate to see FINRA initially target a bank like UBS rather than another institution that has not been nearly as hurt in the recent past. Again, FINRA may find out that other banks altered compliance standards in different ways. Rather than not checking the liquidity of the desired market, another bank may have kept trades off books for a period of time so that they could compound multiple trades, which is essentially creating leverage from thin air.

Various strategies could have been employed by investment banks throughout the 2000s to benefit their lucrative sales and trading businesses. However, after the Dodd-Frank act, and more specifically, the Volcker Rule, banks will have to cut down on trading activity and risk taking. Pure proprietary bets will be banned by investment banking firms, although it will be possible for the banks to hedge their flow trade exposure via proprietary hedges. Only time will tell how professional trading will evolve over the next few years. FINRA may successfully extract money from other banks because of their unnecessary risk taking as well.

UBS is currently trading at about $12.50, down about 24% for 2011.

Editor's Note: This content was originally published on by Abe Raymond.

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