Banking experts said the $2bn loss was a major blow to UBS's reputation, and that of the wider financial sector
A 31-year old man has been arrested by City of London Police on suspicion of fraud in connection with a rogue trading incident that has cost Swiss bank UBS around $2bn (£1.3bn).
The Zurich-based bank uncovered the incident as recently as the last 24 hours and it suffered a near 10% fall in share price in early trading after it revealed the loss could push the bank into the red for the current financial quarter.
The City of London Police arrested a 31-year old man at 3.30am in Central London on "suspicion of fraud by abuse of position". He remains in police custody and the force has begun an investigation. The Financial Services Authority, the City regulator, is understood to have been informed.
City sources believe the bank would be unlikely to reveal the full details of the trading position – thought to be in the equities division – until it had been closed down or reduced on the market.
In a brief statement, UBS said it was still trying to get to the bottom of the matter, which was announced on the third anniversary of the collapse of Lehman Brothers.
"UBS has discovered a loss due to unauthorised trading by a trader in its investment bank. The matter is still being investigated, but UBS's current estimate of the loss on the trades is in the range of $2bn. It is possible that this could lead UBS to report a loss for the third quarter of 2011." It added that "no client positions were affected".
The bank refused to elaborate but in an internal memo to staff, the executive committee of UBS revealed that they only uncovered the incident on Wednesday.
"We regret to inform you that yesterday we uncovered a case of unauthorised trading by a trader in the investment bank. We have reported it to the markets in line with regulatory disclosure obligations. The matter is still being investigated," the internal memo said.
"We understand that you have already had to contend with unfavourable, volatile markets for some time now. While the news is distressing, it will not change the fundamental strength of our firm. We urge you to stay focused on your clients, who are counting on you to guide them through these uncertain times," the management urged the bank's staff who are facing redundancies under a programme of cuts announced only last month.
UBS's headquarters are in Zurich, but the bank operates in many financial centres. It employs around 6,000 people in the UK, largely in the City, although this rogue trading incident may put more pressure on the bank to reduce the size of the division.
Major blow
Banking experts said the loss was a major blow to UBS's reputation, and that of the wider financial sector.
Simon Ballard, senior credit strategist at RBC Capital Markets, said the trading loss would add to public concern over the banking sector.
"At a time of greater regulation, it will raise questions about regulatory capital and whether ringfences are in place to stop this happening," Ballard told Bloomberg TV.
ZKB trading analyst Claude Zehnder told Reuters that UBS bankers "obviously have a problem with risk management".
"Even when the amount isn't so high it is once more a loss of confidence that casts UBS in a poor light," he said.
Last month, UBS announced plans to cut 3,500 jobs as part of a £1.5bn cost reduction programme.
It suffered huge losses during the financial crisis, but returned to profit in February 2010.
The cost of insuring UBS's debt against default rose by around 7% on Thursday morning, according to Gavan Nolan of Markit, before dropping back as traders digested the implications of the loss.
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