UBS takes urgent action to cap losses on derivatives trading

Union Bank of Switzerland, one of the world's biggest banks, yesterday moved to cap its losses on derivatives trading by closing "giant positions" on FTSE five-year options contracts, according to market sources.

The bank, which is expected to announce a big reshuffle of senior staff today, is believed to have paid premium prices for the contracts. The exercise was said to be aimed at extracting UBS from an unhedged position, on which future losses might have amounted to billions of pounds if it had to settle the contracts in full.

The housekeeping by UBS came in the wake of the disclosure this week that it had lost heavily on derivatives trading, estimated by dealers at more than pounds 200m. However, the market had anticipated yesterday's action, forcing UBS to pay a big premium to the normal market price on the options.

One market source said that the implied volatility, which is the key driver of the prices quoted for financial options, shot up from its more normal 17 per cent to 25 per cent. This made option contracts more expensive to buy.

It is believed that UBS took the urgent action yesterday because it had over the last two years pursued a strategy of undercutting other sellers of options.

According to a source, UBS "built up one of the largest books in the City, worth between pounds 3bn and pounds 5bn."

UBS has been one of three dominant traders in FTSE options. It found a vast market for the derivatives among insurance companies selling investment products on which returns are based on the performance of the FTSE 100 index.

Meanwhile, UBS said yesterday that Hans-Peter Bauer, the bank's global head of fixed income, currencies and derivatives, had replaced Ramy Goldstein, in charge of its London derivatives operations. Mr Goldstein was the most senior casualty of the derivatives trading affair.Three other traders in New York have also left.