2011 UBS Adoboli Case Study

Topics: Risk, Risk management, Market risk Pages: 7 (2093 words) Published: April 14, 2013
2011 UBS Adoboli loss of over £2 billion


Adoboli joined UBS as a graduate trainee in 2003. He then worked for delta one trading desk in 2007 which mainly traded Exchange traded fund. Due to the dissatisfaction with his annual salary and bonus of £360,000 and the desire to become a star trader with huge bonus, he started his illicit trading in late 2008 which imposed a huge financial loss on UBS in Sep 2011. In the following passages, We would like to discuss the details of his unauthorized tradings, risks involved and make comments about how risk management cycle can help.

1. Chronological order

Year| Event|
2007 to 2011 (Career)| In 2007, Adoboli started his career in UBS and he earned £360,000 annually.| Oct 2008| Becasue of the financial crisis in 2008, Adoboli lost $400,000 in an account. However, instead of showing a loss, he used a fake hedging trade in FTSE100 Index (UKX) to show a profit of $400,000 instead of a loss. Because he was familiar with the back office, he can hide this loss by fake entries into UBS’s computer system, so called fictitious hedge.| Mar 2010| Adoboli opened an account at IG Index. IG Index was a spread betting firm and it allowed customers to make bets on financial instruments.| Dec 2010| Adoboli’s colleague, Hughes, discovered that Adoboli had exceeded the limit of his authorized trading. And Hughes reported this event to a senior trader, John Bennie. | Jan 2011| Adoboli told Hughes about his umbrella account in an electronic chat.| Summer 2011| The European Market became unstable. Also, Adoboli’s trade began to suffer a loss. In order to earn the money back, he tried to use more of money to invest and earn it back. Unfortunately, he failed to earn the money back and made even a bigger loss. On 8th August 2011, it was estimated that his risk exposure had peaked at $12 billion.| 14 Sept 2011| Adoboli was pressed by a back office accountant, William Steward, questioning about his balance sheet.| 15 Sept 2011| Adoboli sent an email to accept his full responsibility for his unauthorized trades and was arrested at the office. It was found that $5 billion had been risked on Standard & Poor 500 futures and $3.75 billion in the German futures market.| 24 Sept 2011| The Board accepted Adoboli’s resignation.|

2. Risk Identification and analysis

Identification of risk is an essential process in risk management cycle. To manage the risks in an effective way, we have to find out and identify all the risk exposures. Next, another important step is risk analysis. Comprehensive analysis helps us to deal with the risk efficiently and it helps us to figure out the solutions. In this UBS Adoboli loss scandal, we can identify three types of risk involved and they were market risk, operational risk and, regulatory & supervisory risk.

a. Market risk

Market risk is the risk of loss due to adverse movements of the market factors or variables such as interest rate, share prices and volatilities. The change of the market factors or variables may lead to the change in assets, liabilities and some off-balance sheet financial contracts’ value.

In this Adoboli case, the main financial loss was caused by taking long positions of the EuroStoxx, DAX and S&P 500 indexes. However, the market indexes did not move in the way what Adoboli expected.

As a result, UBS faced market liquidity risk as it had to unwind Adoboli’s huge positions with suffering significant loss.

b. Operational risk

Operational risk is the risk of loss due to inadequate, inappropriate, failed or breached internal processes and controls, peoples, system, or from external events. In this Adoboli’s case, the factors that gave rise to operational risk was comprised of internal fraud and weak execution & process management.

i. Internal fraud

Internal fraud is an act tended to defraud, misappropriate property or circumvent regulations, the law or policy which...
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