Credit Suisse fined $388 million over ArcGos collapse

Get Free ArcGos Capital Management Updates

we will send you one myFT Daily Digest Latest Email Rounding Arcgos Capital Management News every morning.

Credit Suisse has been fined $388 million by US and British regulators for “significant failings in risk management and governance” related to the collapse of ArcGos Capital, which caused $5.5 billion in trading losses and helped lead to the Swiss lender’s demise.

US Federal Reserve fined $269 million While the UK Prudential Regulation Authority has banned the bank for “unsafe and unsound counterparty credit risk management practices” raising A record £87 million in fines, according to a series of coordinated statements on Monday.

Swiss supervisor FINMA said Credit Suisse had “seriously and systematically violated financial markets law” and was ordering corrective measures on its new parent UBS, which in March rescued its rival in a government brokerage.

FINMA said it has launched enforcement proceedings against a former employee, but does not have the authority to impose fines on financial institutions.

“Credit Suisse’s failures to effectively manage risks were extremely serious, and posed a significant threat to the firm’s safety and soundness,” said Sam Woods, head of the UK’s PRA. “The seriousness and comprehensive nature of those failures has led to the fine imposed today, which is the largest fine ever imposed by the PRA.”

Credit Suisse suffered the biggest trading blow in its 167-year history when ArcGos failed in March 2021, with the Swiss bank contributing more than half of the total $10 billion lost by international banks offering family office prime broking services. UBS lost $861 million.

Under fund manager Bill Hwang, ArcGos made billions of dollars in bets on American and Chinese stocks by borrowing heavily from banks, which had to be quickly liquidated when the companies fell in value and the firm could not meet margin calls.

Credit Suisse’s shortcomings identified by the three observers included giving half of the bank’s equity to a single counterparty; no oversight at the board level “despite the sheer size of this client position and the associated risks”; lack of “experienced staff of sufficient stature”; Employees are ignoring repeated breaches of exposure limits and are acting on behalf of their clients rather than their firm; And $2.4 billion was paid out to ArcGos just two weeks before it collapsed.

The Fed ordered UBS’s board to submit a plan within 120 days that would establish a “remediation office” to improve oversight of its US operations.

The Financial Times reported the likely amount of the fine last month. Credit Suisse previously set aside only $35 million for a settlement related to ArcGos.

The penalty will be taken as an additional provision in Credit Suisse’s second quarter results, which will be reflected in the merger accounting. UBS has a provision of up to $4 billion to cover regulatory and litigation costs from its acquisition, which was completed last month.

“UBS will apply its operational and risk management discipline and its culture to the combined organisation. , , including actions that address these regulatory findings,” the banks said in a statement.

Credit Suisse appointed law firm Paul Weiss to review the failures in 2021, which concluded that the losses were the result of a “fundamental failure of management and control” and a “frustrating attitude towards risk” at its investment bank.

The bank earned only $17.5 million from the relationship in its final year, despite lending up to $24 billion to the family office, which FINMA described as “four times the position of the next largest hedge fund client”.

ArcGos is one of several unresolved scandals that UBS inherited from Credit Suisse. These include lawsuits over its involvement in defunct supply-chain finance firm Greenseal Capital, a US tax evasion case, a lawsuit brought by the Republic of Mozambique, and private lawsuits over US residential mortgage-backed securities.

It is also appealing cases brought against former Georgian prime minister Bidzina Ivanishvili and his dealings with a group of Bulgarian cocaine traffickers.