Federal Reserve announces consent order & $268.5 million fine with UBS Group AG, of Zurich, Switzerland, for misconduct by Credit Suisse. The misconduct involved Credit Suisse's unsafe & unsound counterparty credit risk management practices with Archegos.
https://www.federalreserve.gov/newsevents/pressreleases/files/enf20230724a1.pdf
The Federal Reserve Board on Monday 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.
Wut mean?:
- The Federal Reserve Bank of New York found various deficiencies in the Credit Suisse's' risk management processes.
- Credit Suisse had a prime services business that operated across the US, UK, Europe, and Asia, mainly catering to hedge funds and institutional investors.
- The Prime Services Risk department handled daily risk management tasks, including setting margin rates.
- The Credit Risk Management department was an independent entity within Credit Suisse that assessed credit risks posed by counterparties.
- Credit Suisse had a client relationship with Archegos Capital Management LP since 2012 (and its predecessor since 2003). Their relationship was managed by Credit Suisseโs New York-based Prime Services and Credit Risk Management teams.
- Archegos focused on a long-short equity strategy, predominantly in tech and media, and used total return swaps with counterparties, including Credit Suisse. Their portfolio at Credit Suisse became increasingly concentrated from mid-2020 to early 2021, consistently breaching Credit Suisse's internal risk limits.
- The risks posed by Archegos' portfolio were known, but Credit Suisse took no effective action to mitigate them.
- Credit Suisse had various management and governance failures, including inadequate reputational risk review, lack of clear accountability, not obtaining enough margin from Archegos, and not effectively managing data quality for risk metrics.
- In March 2021, Archegos defaulted on Credit Suisseโs margin calls, leading Credit Suisse to liquidate its positions and suffer losses of approximately $5.5 billion.
- In June 2023, UBS Group AG acquired Credit Suisse Group AG. UBS became the successor of Credit Suisse and the Federal Reserve oversees UBS's operations in the U.S.
- UBS and the Federal Reserve want U.S. Operations to function safely and in compliance with laws. UBS has started fixing the weaknesses at Credit Suisse.
- UBS, Credit Suisse, and the Federal Reserve agreed to a consent Cease and Desist Order because of the above issues. This order involves penalties for the identified unsafe practices.
- The boards of directors of both UBS and Credit Suisse approved this agreement, waiving their rights to challenge or contest the order in any capacity.
- Punishment? A civil money penalty in the amount of $268,494,109.20
Within 90 days of the Reserve Bank accepting this assessment, UBS must provide a detailed Counterparty Credit Risk Management Remediation Plan including:
i. Ensuring adequate authority, resources, and structure to fix the Identified Gaps and align with Regulation YY.
ii. Clearly defined roles and responsibilities for committees and individuals, along with a way to measure their effectiveness.
iii. Actions to improve the accuracy, speed, and suitability of risk measures related to counterparty credit risk. This includes improving potential exposure metrics and stress testing methods.
iv. Enhancing the framework for setting risk limits, including processes about handling and resolving limit breaches, consequences for unresolved breaches, and a framework for approval or exceptions.
v. Improving the client onboarding process and ongoing monitoring. This should involve better assessments of a client's reputation, history, risk profile, and exposures through more detailed stress-testing.
vi. Providing clear timelines and milestones for the implementation of the plan and ensuring these improvements are maintained in the long run.
vii. Detailing interim measures for managing counterparty credit risk until the full plan is implemented.
TLDRS:
- Credit Suisse had ties with Archegos Capital Management LP since 2012 (and its precursor from 2003).
- Archegos primarily invested in tech and media using a long-short equity strategy and engaged in total return swaps, notably with Credit Suisse. From mid-2020 to early 2021, their portfolio at Credit Suisse became overly focused, frequently crossing Credit Suisse's risk thresholds.
- Credit Suisse was aware of the Archegos risks but failed to act effectively.
Failings at Credit Suisse included:
- Poor reputational risk review.
- Ambiguity in accountability.
- Inadequate margin collection from Archegos.
- Poor data quality management for risk metrics.
- In March 2021, after Archegos couldnโt meet Credit Suisse's margin calls, Credit Suisse had to sell its stakes, incurring around $5.5 billion in losses.
- By June 2023, UBS Group AG acquired Credit Suisse Group AG, with UBS now overseen by the Federal Reserve in the U.S.
- Both UBS and the Federal Reserve aim for U.S. Operations to be compliant and safe. UBS began rectifying Credit Suisse's flaws.
- Due to the outlined issues, UBS, Credit Suisse, and the Federal Reserve reached a consent Cease and Desist Order, which includes penalties for the unsafe practices.
- Both UBS and Credit Suisse's boards consented to this agreement, forfeiting any rights to dispute the order.
- As a penalty, a civil fine of $268,494,109.20 imposed.
- Within 90 days of the Reserve Bank's nod, UBS is to present a comprehensive Counterparty Credit Risk Management Remediation Plan. The plan will address several key areas including ensuring authority and resources, defining roles, refining risk measures, revamping risk limit settings, bettering client onboarding and monitoring, setting clear plan timelines, and devising interim risk management strategies.
