Federal Reserve Alert! 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. The misconduct involved Credit Suisse's unsafe and 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 Suisse’s 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 Suisse’s 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 bocontinue