UBS Cracks Down on Options Trading by Brokers and Families
It’s no secret that many stockbrokers have a penchant for trading, but some big firms are concerned that their brokers’ predilections are creating credit and reputational risks.
UBS Wealth Americas has imposed new options trading restrictions on employees and their families after discovering “several situations” early this year when margin accounts became undercollateralized or fell into a deficit, according to notices sent to field leadership.
In early February, the broker-dealer unit of the Swiss bank began requiring employees to get pretrade credit approvals before being allowed to trade naked options on leveraged equity exchange traded funds, and has since extended the obligation to other underlying securities.
“Since that time, it has also become evident that there is a potential exposure in periods of market volatility for accounts that are not able to meet ongoing margin requirements for naked options broadly,” said an April 5 missive from the firm’s divisional directors. “[T]here are a number of employee/employee-related accounts that actively participate in naked option trading, particularly of a short-term nature.”
In a sign of the wirehouse’s concerns, the memo said the new credit and review policy was effective immediately and would require a heavier “workload” for managers who would temporarily have to manually review each planned trade and assess risk based on each employees’ risk profile. As of June 1, some of the procedures were integrated into UBS’s automated order-entry “review and release” approval system, according to another memo reviewed by AdvisorHub.
The urgency of the new control measures—which require full initial margin to be in an account prior to trade executions—reflect both reputational risk and at least one trading blow-up that led to the dismissal of three UBS employees, according to sources.
“The expectation is that we hold ourselves to the highest standards with all accounts, including our employee/employee-related accounts,” the April 5 memo to field leadership said. “As managers, you need to ensure proper employee trade supervision, which includes assessing whether a given risk is appropriate for the employee.”
The firm on April 19 discharged Madison, Wis. branch manager Mark Pent, the branch’s Chicago-based market supervisory officer Mark Munizzi and Travis Collings, a junior associate on one of UBS’s largest teams who sources said ran up big losses in options accounts held in the name of a close relative.
UBS dismissed Pent and Munizzi for failing “to adequately supervise employees in association with the risks of an uncovered options strategy in employee and employee related accounts” and for giving “varied responses” in a review of their behavior, according to their BrokerCheck records. Collings admitted that he reopened an account “and delivered naked options into the account after management had previously restricted and closed the account,” his BrokerCheck record says. He also failed to satisfy margin calls, it said.
Munizzi, a veteran compliance official, implied in his response to UBS’s discharge that the firm’s internal margin processes failed. “I was not notified by UBS Central Supervision or the processing center operation manager that the employee and employee related account had unsecured positions and house calls beginning on January 29, 2018,” he wrote in a comment on his BrokerCheck history.
As soon as he learned of the issues on February 5, he notified appropriate managers and took immediate steps to cover the positions at the opening of the market on the next business day, according to his comment. “My responses were to the best of my recollection, and never varied,” he wrote.
Munizzi, who began his brokerage career in 1987 at Merrill Lynch and had been with UBS since 2003, did not respond for requests for additional comment. Pent and Collings could not be reached.
Under the new UBS procedures, brokers must perform options analyses and submit screen shots of values in their accounts through the order-entry system after confirming they have sufficient margin. They also must receive final pretrade approvals from managers. The new review-and-release process is similar to the trade-routing process for penny stocks, a June policy update said.
In another cautionary procedure, the firm’s order-entry system as of this month began “hard-blocking” orders from clients and brokers for naked options on levered and inverse ETFs. Those orders now require manual ticket submissions and prior trading approval from the firm’s credit risk control unit.
A UBS spokesman declined to comment on the new options policies, the percentage of the firm’s brokers who actively trade uncovered options or the reasons for the changes.
Sources at Merrill Lynch and Morgan Stanley said they have made no major changes to employee options trading policies this year, as did an official at Wells Fargo Advisors.
“While WFA reserves the right to increase its margin requirements to address market volatile conditions, the firm does not have any immediate plans to increase margin requirements, due to market volatility, for associate or associated-related accounts,” Scott Spears, head of retail derivatives trading wrote in an e-mail.
Wells conducts quarterly supervisory reviews of such accounts and will take action to increase supervision or shut down accounts that are trading “in an appropriate or reckless fashion,” he wrote, adding: “Those are very rare instances.”
—Mason Braswell contributed to this story.