Union Bank of Switzerland lost $430M on equity derivatives — a Swiss bank's hidden risk

Union Bank of Switzerland (UBS) was one of Switzerland's largest banks, known for its conservative wealth management business. In the late 1990s, the bank's investment banking division built a large portfolio of complex equity derivatives — including structured notes and leveraged positions — that were far riskier than the bank's management understood.

In 1998, the derivatives positions went catastrophically wrong when the market moved against the bank's bets. UBS announced a loss of CHF 630 million ($430 million) from the equity derivatives book. The loss was particularly damaging because it had been hidden from the bank's senior management and board until it was too late.

The scandal deepened when it emerged that the derivatives book had been built by the bank's equity derivatives desk without proper risk controls, and that the bank had been unaware of the true size of the positions. The loss was a major factor in UBS's decision to merge with Swiss Bank Corporation later that year.

The merger created the modern UBS, but the derivatives loss was a foreshadowing of the trading scandals that would continue to plague the merged entity for decades — including the $2 billion loss by Kweku Adoboli in 2011.