City of London police confirm arrest of 31-year old man at 3.30am in London on 'suspicion of fraud by abuse of position'

A 31-year-old man – Kweku Adoboli – has been arrested by City of London police on suspicion of fraud in connection with an alleged rogue trading incident that has cost Swiss bank UBS about $2bn (£1.3bn).

The Zurich-based bank uncovered the incident in the past 24 hours. Shares in UBS plunged nearly 10% after it revealed the loss, which could push the bank into the red for the current financial quarter.

The City of London police confirmed they had arrested a 31-year old man at 3.30am in central London on "suspicion of fraud by abuse of position". The police did not identify the individual who remains in custody, but sources say he is Adoboli. The force has begun an investigation.

The Financial Services Authority, the City regulator, is understood to have been informed. People wanting to work in the City often need to be registered with the FSA, and Adoboli's entry shows he has been on the FSA's register since 2006 at UBS.

The bank would not comment but Adoboli is understood to work in its equity division and on a trading desk called Delta One that was involved with its exchange traded funds (ETF) business. ETFs are complex financial instruments that comprise a basket of investments intended to mimic a market's movements while Delta One traders try to make huge profits on tiny differences between prices.

The Serious Fraud Office may yet become involved after it said it was "seeking discussions" with the bank, the City of London police and the FSA about how to proceed if fraud needed to be investigated. The SFO had already issued a warning about the "inherent dangers" of ETFs because of their complexity.

It is understood that the entire trading desk, including Adoboli's supervisor John Hughes, has been sent home while the investigation continues.

Louise Cooper, analyst at BGC Partners, said the losses are rumoured to relate to a Swiss franc trade that went wrong after the Swiss National Bank intervened to lower the currency. On 6 September, SNB warned that it would no longer allow one Swiss franc to be worth more than €0.83 – equivalent to SFr1.20 to the euro.

"The Swiss currency moved by 8% straight away which is a huge move for FX [foreign exchange] markets. Probably a good guess as to where the loss came from, but at the moment we do not know," she said.

It was not clear, though, whether this was the explanation for what might have gone wrong and UBS did not deviate from a brief statement in which it said it was still trying to get to the bottom of the matter.

On the third anniversary of the collapse of Lehman Brothers, the Swiss bank said: "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 its executive committee revealed in an internal memo to staff that they had uncovered the alleged fraud on Wednesday.

"We regret to inform you that yesterday we uncovered a case of unauthorised trading by a trader in the investment bank," the memo said. "We have reported it to the markets in line with regulatory disclosure obligations. The matter is still being investigated."

It added: "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 staff, who are facing redundancies under cuts announced 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 could increase 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 about 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.