BRITISH police last night arrested a man in relation to rogue trading that racked up as much as $US2 billion ($1.95 billion) in losses for UBS, in a move that will see the Swiss banking giant post a third-quarter loss.
The revelations will also further shake confidence across the troubled European banking sector.
UBS, which dominates the Australian investment banking market, last night gave few details about the incident, including how the losses occurred. However, police in London last night arrested a 31-year-old man in relation to the trading loss.
London police said they had arrested the man on ''suspicion of fraud by abuse of position'' at 3.30am local time. He was in police custody and an investigation had been launched.
UBS last night assured clients, however, that their positions were not affected.
''The matter is still being investigated, but UBS's current estimate of the loss on the trades is in the range of $US2 billion,'' UBS said in a statement. ''It is possible that this could lead UBS to report a loss for the third quarter of 2011.''
Spokespeople for UBS in Australia and Zurich last night declined to comment beyond the statement. UBS shares in Europe plunged after the announcement. In early trade in Zurich, UBS was down more than 7 per cent.
The rogue trading affair could not have come at a worse time for the troubled European banking sector, which is facing its toughest funding challenges since the collapse of the Wall Street bank Lehman Brothers three years ago.
Banks there are heavily exposed to the problem economies of Greece, Italy and Spain while questions remain over the health of their balance sheets.
''This will be another blow for the confidence for the sector that can least afford it,'' one senior trader at a rival investment bank said last night.
The chief executive of UBS, Oswald Grubel, labelled the loss as ''distressing'' but said it would not change the ''fundamental strength'' of the bank.
The firm was working ''to get to the bottom of the matter as quickly as possible, and will spare no effort to establish exactly what has
happened,'' he wrote in an email to employees.
While UBS does not operate a banking retail business in Australia, it dominates investment banking and equities trading and is a counter-party to every major Australian bank and broking house.
Many Australian UBS employees were yesterday still in the dark about the affair, suggesting the focus around the losses remained firmly offshore.
Extreme volatility in global markets in recent months was likely to have contributed to the size of the losses, traders said.
The affair is likely to stoke memories of the former French trader Jerome Kerviel, who is accused of gambling away billions of euros of at Societe Generale, one of France's three biggest banks, in risky dealings that cost €4.9 billion ($6.6 billion) in losses.
SocGen shocked the financial world when it revealed in early 2008 that it had to cancel more than €50 billion of unauthorised deals Kerviel is said to have made.
The former trader has long maintained bank managers knew of his dealings and turned a blind eye so long as he made a profit.
Since the Kerviel affair, attention has turned to another French trader, 31-year-old Fabrice Tourre from Goldman Sachs, dubbed ''Fabulous Fab'', who has been charged with fraud by the US Securities and Exchange Commission and accused of concocting some toxic investment products.
One of the most famous rogue trading cases took place in 1995, when Nick Leeson single-handedly caused the collapse of Barings Bank after costing the group about $1.8 billion.
Australia had its own banking scandal in late 2003, when four traders were at the centre of a National Australia Bank foreign currency scam that resulted in $360 million worth of losses. Three of the four were sentenced to jail.
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