DEBT FINANCING. UBS a $2 billion Delta loss puzzles experts

LONDON (Reuters) - Kweku Adoboli, the dealer arrested in connection with a 2-billion dollar loss at UBS, worked on the Delta desk 1 trade, a usually low-profile company require a thorough knowledge of both the front and back office of an investment bank.
Industry insiders said it was hard to see how the loss that said UBS was deducted up in illicit trade could by what pretty easy trading strategies as are known as "Vanilla" caused in the industry.
Jérôme Kerviel, the trader, the over a 4.9 billion euro loss in the Société Générale (SOGN to three years jail.)(PA) worked in Delta 1 and knew that his bank systems well enough to fictional hedge positions create to be able to.
Rejected entrants, which are called, said it was hard to imagine a loss, as great as that revealed position Delta 1 desk of UBS on Thursday from legitimate trade.
"It should be easy to see (a merchant accounts) on a daily basis and have no great surprise..., unless it move a massive is and then in the location you should, to explain it," one person, the work in the area of told of Reuters.
Good knowledge of a Bank of front and back-office in principle makes it easier for a trader to game the system. This played a role in the earlier case of Nick Leeson whose trade in Singapore British Bank Barings in 1995 brought.
1 Strategies try Delta to receive a high correlation between a derivative and the asset, it referenced the. Delta is the degree of correlation, and 1 is the highest on the scale.
Adoboli was a market maker in exchange traded funds (ETFs), who worked in Delta 1 trade, according to his LinkedIn page. He was previously a trade support analyst, according to the listing on the networking site.
ETFs are normally as a cost-effective way for investors to exposure to baskets shares and other assets sold, and traded just like equities.
In some cases, they are designed with the use of derivatives, mimic of the underlying asset, without it. These are known as synthetic ETFs.
Delta 1 trade tends to very low margin rates, the person who said in the area, because the two instruments that are traded are so closely related. The forces that dealer on costs more than other desks to be.
"The traders tend to have a very intimate knowledge of all areas of activity." You need to know the costs from front to back. They tend to a better understanding of the general arrangement of the systems of a company, ", said the person."
ETFs have experienced an increase in the popularity of investors, angry with the high costs of the Fund Manager fees are for the selection of stocks on their behalf without much of a return in the last few years.
REGULATORY GLARE
The instruments have been under control of the regulatory authorities. The financial stability Board FSB.L, commissioned by leaders of the world to reduce the systemic risk, said financial markets watch dog in April of this year, to take a closer look at their proliferation.
While the simplest ETF portfolios mirror the index that the you are designed to keep track of, keep many derivatives of the underlying assets, such as swaps, futures and options.
These synthetic ETFs do not have basic values and instead try to replicate it by derivatives. Regulators have especially singled out these instruments, which say that they are poorly understood.
The Bank of England said in June that the product must be a closer monitoring and the British financial services authority has called into question if complex variations of the ETFs for small investors were appropriate.
An ETF market maker said that it is his task to the securities to replicate, from which the ETF and then benefit from discrepancies between the price for the replicated securities and the price in the market for the actual assets.
Differences in currency between the derivative and the assets that you want to track them must be secured. For example, market maker trading can a Swiss franc price ETF, the constituents of the S & P-500 should pursue a swap to secure the movement of the two Exchange rates security steps.
Always the wrong way could create this hedging losses.
"But the quantities concerned to generate a $2 billion loss would so great." This type of loss with the market, that the people who usually could not be created, ", said the market maker."

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