UBS failure puts outsourcing of services to India under scanner, again

Outsourcing of services by Europe’s banking sector to India has come under the spotlight once again.

The Swiss financial market regulator pointed to failings involving work that was given to an unnamed Indian outsourcing firm, whose report on trades should have acted as a key control for identifying suspicious trading activity.

The Swiss Financial Market Supervisory Authority, FINMA, and Britain’s Financial Services Authority (FSA) published their reports on enforcement proceedings taken against UBS, following the $2.3-billion losses due to unauthorised trading by Kweku Adoboli , a rogue trader.

Adoboli was jailed for seven years earlier this month on two counts of fraud, while the FSA said it had fined UBS £29.7 million for “serious weaknesses” in its procedures, management systems and internal controls.

While the report by the FSA makes no mention of India, the FINMA report noted, among other failings at UBS, the role of an India-based outsourcing provider that was in charge of managing a report on trades carried out by the Exchange Traded Fund desk on which Adoboli worked with deferred settlement terms of 14 days (when trades are settled a certain number of days after they are agreed to). The reports are considered important to establishing the bank’s risk exposure, as deferred settlement of 14 days (referred to as T+14) is less standard than the typical 3-day settlement cycle.

This report should have been key to detecting suspicious trading activity, the regulator said.

Adoboli used fictitious ETF trades with deferred settlement date as one of several means to hide the desk’s true risk exposures by generating fictitious profit and loss and risk exposure, the regulator noted. These trades were cancelled before being settled, and in some cases amended by Adoboli. “Deferred settlement trades should have been identified on the T+14 report. However, this report was non-operational between May and November 2010 and September 2011 (shortly before discovery of the Loss),” FINMA said.

Settlement date misused

“The importance of this report was not understood,” it continued, noting that the report had failed twice for “extended periods of time”, and that the second went unnoticed for ten months. “Consequently, there was no working control in place to identify the large, deferred settlement trades booked by the ETF Desk.”

The failure of this control illustrated the “poor organisation and risk management within UBS”, the regulator said. Adoboli’s activities might have been detected at an earlier stage had UBS had a proper control framework in place, it added.

While the T+14 failure was just one of a number chronicled by the regulator, it follows other reports that have pointed to regulatory failures linked to work outsourced to India by the European financial services sector.

In a report earlier this year, the New York State Department of Financial Services pointed to a number of failures at Standard Chartered including the outsourcing of Office of Foreign Assets Control compliance to Chennai “with no evidence of any oversight or communication between the Chennai and New York offices.”

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