The Prudential Regulation Authority (“PRA”) has fined Credit Suisse International (“CSI”) and Credit Suisse Securities (Europe) Ltd (“CSSEL”, together with CSI, the “Firms”) £87 million for significant failures in risk management and governance between 1 January 2020 and 31 March 2021, in connection with the Firms’ exposures to Archegos Capital Management (“Archegos”).
This is the PRA’s highest fine and the only time a PRA enforcement investigation has established breaches of four PRA Fundamental Rules.
The PRA action is part of a co-ordinated global resolution, incorporating action by the Swiss Financial Market Supervisory Authority (“FINMA”) and the Federal Reserve Board, which provides for combined penalties in excess of $387.5 million being imposed by the PRA and Federal Reserve Board.
The Firms provided prime brokerage services and entered into equity total return swaps (“TRS”) with Archegos. All such TRS positions were remotely booked into the Firms in the UK via other entities in the Credit Suisse group. When Archegos defaulted in March 2021, around US$5.1 billion of losses were booked to the Firms. These losses for Credit Suisse resulted in significant financial and reputational damage. Credit Suisse was ultimately acquired by UBS Group AG (“UBS”) in 2023.
The Firms’ risk management oversight and practices fell well below the regulatory standards required. The failings were found to be symptomatic of an unsound risk culture within the business line that failed to balance considerations of risk against commercial reward appropriately. Broadly, this resulted in a failure by the Firms to address the risk arising from Archegos’ portfolio, a confusion of responsibilities and failures to adequately respond when limit breaches were exceeded. The Firms had failed to learn from past similar experiences and had insufficiently addressed concerns previously raised by the PRA.
Sam Woods, Deputy Governor for Prudential Regulation and Chief Executive Officer of the PRA, said:
“Credit Suisse’s failures to manage risks effectively were extremely serious, and created a major threat to the safety and soundness of the Firms. The seriousness and widespread nature of those failures has led to today’s fine, which is the largest ever imposed by the PRA.”
As a result, the Firms breached Fundamental Rules 2, 3, 5 and 6 of the PRA Rulebook. Fundamental Rule 2 requires that a firm to conduct its business with due skill, care and diligence. Fundamental Rule 3 requires that a firm must act in a prudent manner. Fundamental Rule 5 requires that a firm must have effective risk strategies and risk management systems. Fundamental Rule 6 requires that a firm must organise and control its affairs responsibly and effectively. This all resulted in the Firms failing to:
- Instil a culture within the investment banking division that appropriately balanced the considerations of risk against commercial reward;
- Evaluate and take due account of the risks to the Firms, and the Credit Suisse group, arising from their exposures in relation to Archegos’ portfolio;
- Appropriately escalate the risks within Archegos’ portfolio with the result that there was inadequate oversight in the UK of risk remotely booked into the Firms;
- Take sufficient steps to implement an effective risk mitigation strategy in respect of Archegos’ portfolio. Including a failure to take reasonable steps to reduce risk when it would have been prudent to do so; and
- Have a governance framework that adequately scrutinised or discussed the risks posed to the Firms by Archegos’ portfolio
The Firms agreed to resolve this matter and therefore qualified for a 30% reduction in the fine imposed by the PRA. Without this discount, the fine imposed by the PRA would have been £124.4 million.
Source: PRA
Federal Reserve Board announces a consent order and a $268.5 million fine with UBS Group AG, of Zurich, Switzerland, for misconduct by Credit Suisse, which UBS subsequently acquired in June 2023
The Federal Reserve Board announced a consent order and a $268.5 million fine with UBS Group AG, of Zurich, Switzerland, for misconduct by Credit Suisse, which UBS subsequently acquired in June 2023. The misconduct involved Credit Suisse’s unsafe and unsound counterparty credit risk management practices with its former counterparty, Archegos Capital Management LP.
In 2021, Credit Suisse suffered approximately $5.5 billion in losses because of the default of Archegos, an investment fund. During Credit Suisse’s relationship with Archegos, Credit Suisse failed to adequately manage the risk posed by Archegos despite repeated warnings. The Board is requiring Credit Suisse to improve counterparty credit risk management practices and to address additional longstanding deficiencies in other risk management programs at Credit Suisse’s U.S. operations.
The Board’s action is being taken in conjunction with actions by the Swiss Financial Market Supervisory Authority and the Bank of England’s Prudential Regulation Authority. The penalties announced by the Board and the Prudential Regulation Authority total approximately $387 million.
Source: Federal Reserve
Archegos: FINMA concludes proceedings against Credit Suisse
In the course of its enforcement proceedings, the Swiss Financial Market Supervisory Authority FINMA found that Credit Suisse had seriously and systematically violated financial market law in the context of its business relationship with the Archegos family office. FINMA is ordering corrective measures from its legal successor, UBS. In addition, FINMA has opened enforcement proceedings against a former Credit Suisse manager. At the same time as FINMA, the authorities in the USA and the UK are also announcing their findings in this matter.
In March 2021, several investment banks incurred large losses due to the collapse of the Archegos hedge fund. Credit Suisse suffered the biggest loss of over USD 5 billion. FINMA took various immediate risk-reducing measures in April 2021 and opened enforcement proceedings (see press release).
Risks in the hedge fund business
Among other things, the Archegos family office took synthetic (i.e. without owning the corresponding stock) stock positions (“long” or “short” depending on price expectations) with investment banks such as Credit Suisse. These are instruments that replicate the performance of an underlying asset, for example, a share (total return swaps). The Credit Suisse investment bank undertook, for example, to pay Archegos any increase in the value of the synthetically held positions. Conversely, Archegos had to bear losses or provide collateral when their positions suffered a decline in value. This type of business is typically conducted by hedge funds.
In order not to incur losses on such transactions itself, Credit Suisse hedged against market risks. Among other things, it thus bought or sold actual shares on the capital markets in its own name, in parallel to the synthetic positions taken by Archegos. Profits and losses should thus have been balanced automatically. The aim of investment banks such as Credit Suisse is to generate income in any case, regardless of the success of the hedge fund’s bet and the price development, thanks to the fees incurred.
Large positions led to losses in fire sale
Archegos built up very large positions in a few equity securities. When the price of some of these securities dropped, Archegos no longer had the necessary funds to compensate for these losses in value. In this constellation, Credit Suisse itself had to sell the shares that it had previously acquired in its own name as a hedge. In doing so, it suffered massive losses due to share prices having fallen sharply in the meantime. Due to the internal organisation of Credit Suisse, these losses were incurred by the London entity, even though most of the events had taken place in New York.
Various organisational deficiencies
During the proceedings, FINMA identified the following deficiencies at Credit Suisse:
- Too big a position and risks: Credit Suisse’s own position due to the relationship with Archegos was extremely high for months. It had a value of USD 24 billion in March 2021. This corresponded to four times the position of the next largest hedge fund client and more than half the equity of Credit Suisse Group AG. The bank was not able to adequately manage the risks associated with this position.
- No involvement of responsible members of the executive board: Despite the huge size of this client position and the associated risks, the members of the bank’s executive board were not informed of the facts. There was no requirement that responsible executive board members address significant and risky business relationships on their own initiative as standard.
- Insufficient response to limit overruns: Credit Suisse’s risk monitoring regularly indicated that applicable limits had been exceeded in the relationship with Archegos and that the bank was therefore exposed to high risk of loss. However, the responsible employees acted in favour of the client. Overruns were insufficiently objected to. On the one hand, the bank made far too low additional demands on Archegos. On the other hand, exceeded limits were simply increased repeatedly. Thus, the overruns were reduced, but the actual risks of loss increased.
- Concentrated risks instead of hedging: Archegos took large positions with only a few issuers. Credit Suisse built up parallel stocks in these securities as a hedge, which in some cases led to significant market shares in these securities. Overall, the bank incurred enormous and concentrated risks of loss, which materialised in the subsequent fire sale. The bank took completely insufficient account of the fact that the collateral could not fulfil its purpose in an emergency because it was not diversified.
- Payout on the verge of collapse: Two weeks before the collapse of Archegos, its positions still had a high value. Archegos therefore demanded that Credit Suisse pay out USD 2.4 billion. The bank paid this amount based on the contract with Archegos. It is true that certain employees assumed that the bank had been contractually obliged to make these payments. However, there are no indications that the bank actually examined the possibility internally of not having to make these payments or considered suspending them until additional collateral was provided or offsetting them against such collateral in order to minimise its own risks.
Organisation and risk management insufficient
As a result, there were serious deficiencies at Credit Suisse during the period under review with regard to the requirements of appropriate administrative organisation within the meaning of the Banking Act. In particular, the bank was unable to adequately identify, limit and monitor the significant risks associated with Archegos. The bank has thus seriously and systematically violated the organisational requirements under banking law.
Limits for own positions and adjustments to the compensation system
FINMA is ordering corrective measures directed at Credit Suisse AG, which continues to exist, and UBS Group AG, as the legal successor to the Credit Suisse Group AG, as a result of the merger of Credit Suisse and UBS.
- FINMA requires UBS to apply its restrictions on its own positions relating to individual clients throughout the financial group.
- The compensation system of the entire financial group must provide for bonus allocation criteria that take into account risk appetite. Therefore, for employees with particular risk exposure, a control function must assess and record the risks taken before the bonus is determined. UBS already has corresponding rules in place, which FINMA is now ordering to be legally binding.
Proceedings against an individual
FINMA has also opened enforcement proceedings against a former Credit Suisse manager. FINMA is not commenting on the identity of this person or details of the proceedings.
Good coordination with foreign authorities
FINMA acknowledges the good cooperation in the enforcement proceedings with the Federal Reserve Board (USA) and the Prudential Regulation Authority (UK). The US and UK authorities are also publishing the results of their investigations in this case. They imposed fines of USD 268.5 million and GBP 87 million respectively.
Source: FINMA
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