Credit Suisse has published a scathing report on its internal failures surrounding the Archegos scandal, after the collapse of the family office saw it lose over $5.5 billion.
The Swiss investment bank was the most significantly hit following the implosion of Archegos, followed by Nomura which reported losses of nearly $3 billion.
Law firm Paul Weiss, Rifkind and Warton produced the report, which highlighted the bank’s repeated failure to address continuous red flags from potential exposure limits put in place and manage margin levels attached to swap positions.
The report, which interviewed 80 current and former employees and collected over 10 million documents, found that neither business or risk personnel had engaged in fraudulent or illegal activities related to the Archegos collapse, but risk systems had failed to operate sufficiently to identify critical risks.
“There were numerous warning signals—including large, persistent limit breaches—indicating that Archegos’s concentrated, volatile, and severely under-margined swap positions posed catastrophic risk to [Credit Suisse],” said the report. “Yet the business, from the in-business risk managers to the global head of equities, as well as the risk function, failed to heed these signs, despite evidence that some individuals did raise concerns appropriately.”
Credit Suisse failed to action a response to Archegos’ “continuous” potential exposure limit breaches throughout the end of last year and into the beginning of 2021, the report added, highlighting a meeting the bank held in September where this was discussed but no additional solution was actioned.
In addition, executives failed to action calls for dynamic margining as a solution to the limit breaches while Archegos was awarded several temporary bespoke risk appetite increases, including one in October of $900 million. According to the report, the family office avoided a 10% directional bias and additional margin in 2017 by claiming that its short swaps portfolio in prime financing offset its long-biased prime brokerage portfolio.
It also highlighted that in 2019, Credit Suisse agreed to reduce Archegos’ default margin rate on swaps to 7.5% subject to certain conditions, following claims from the family office that it had been able to obtain more competitive rates from rival prime brokers.
Elsewhere, the report emphasised a lack of risk personnel resources at the bank, highlighting that from 2019, 40% of Credit Suisse’s risk managing directors left the investment bank. It also claimed Credit Suisse had not learned from previous similar events, which included the default of New York-based hedge fund Malachite Capital in March last year when its volatility-based bets fell apart.
Credit Suisse is now planning to write down $35 billion of hedge fund balances, where it will focus on its underlying risk positions and the types of hedge fund clients it services. The scandal also prompted the exit of senior executives, including the co-heads of its prime brokerage business, its chief risk officer, and the head of the investment banking division.
“While the bank has already taken a series of decisive actions to strengthen the risk framework, we are determined to learn all the right lessons and further enhance our control functions to ensure that we emerge stronger,” added Credit Suisse chairman António Horta-Osório in a statement.