The frank 165-page report by law firm Paul, Weiss, Rifkind, Wharton & Garrison found the losses were the result of a “fundamental failure of management and controls” in the bank’s prime brokerage unit and investment bank.
Credit Suisse said in response it would continue to remediate the shortcomings identified and put “risk management at the heart of its decision-making processes”.
Representatives for Archegos have not responded to requests for comment.
Here are details from the report, which can be found here https://www.credit-suisse.com/about-us/en/reports-research/archegos-info-kit.html
ARCHEGOS RELATIONSHIP WITH CREDIT SUISSE
Credit Suisse’s relationship with Archegos head Bill Hwang began in 2003 through his Tiger Asia fund.
In 2012, Tiger Asia and Hwang settled insider trading allegations with the U.S. Securities and Exchange Commission. In 2014, Hwang and Archegos were banned from trading securities in Hong Kong for four years.
Credit Suisse continued to do business with Archegos both during and after these criminal and regulatory matters, the report said.
Credit Suisse conducted two reputational risk reviews of Archegos, but the first did not begin until “years” after the SEC and DOJ resolutions.
In 2015, a routine compliance review of Archegos picked up negative news about Hwang, which led Prime Services to subject Archegos to a reputational risk review.
“That process was largely perfunctory”, the report said.
When the Hong Kong trading ban was lifted in 2018, prime services sought permission to restart trading with Archegos in Asia, which resulted in a second reputational risk review that largely mirrored the first. Trading in Hong Kong restarted.
ARCHEGOS RISK MANAGEMENT 2012-2019
Credit Suisse’s risk management internal credit rating of Archegos improved several rungs between 2012 and 2016 due to the fund’s increasing net asset value (NAV), which grew from $500 million in 2012 to $3.9 billion in 2016.
In 2019 Archegos asked Credit Suisse to materially lower its swap margin requirements, from around a 15-25% initial margin. Credit Suisse agreed to a new standard swap margin rate of 7.5% in May 2019.
This led Archegos to “significantly increase its swap exposure with Credit Suisse”.
In November 2019, an annual credit review of Archegos recommended maintaining its BB- rating and more than doubling the fund’s risk limit, despite a 40% decline in its net asset value.
BUILD UP OF RISK IN 2020
Over the course of 2020, Archegos’s risk profile increased “significantly”.
“Archegos began regularly breaching its stress scenario limits,” the report said.
“Rather than call additional margin, as was its contractual right, Credit Suisse attempted to re-balance Archegos’s portfolio by requiring that it add market shorts”
By Sept. 1, 2020, Archegos’s overall holdings at Credit Suisse had risen to $9.5 billion, more than 75% of which was long.
Archegos began regularly breaching its risk limits with Credit Suisse in the spring of 2020. By April 2020, Archegos’s “potential exposure” was more than 10 times its $20 million limit.
Meanwhile, the value of Archegos’ investments fell from approximately $3.5 billion in February to $2 billion in April, triggering an option for Credit Suisse to terminate its swaps portfolio.
Prime Services did not terminate the portfolio, but risk management asked the business to confirm its comfort with Archegos’s existing margin levels.
The business responded that it “remain(ed) comfortable with the existing margin framework”.
By July 16, 2020, Archegos had over $600 million in “net scenario exposure” — more than 240% of its limit. Within a week, on July 22, 2020, Archegos’s net exposure had jumped to $828 million.
“From that point on, Archegos remained in breach of its scenario limits virtually every week until its March 2021 default”, the report said.
By the end of December, the concentration and liquidity risk of Archegos’s portfolio had substantially increased.
RED FLAGS RAISED
In around September 2020, a risk management analyst covering Archegos raised concerns to his supervisor about Archegos.
He said the team in New York was not “adequately staffed to be reliable”.
The analyst and his supervisor agreed that the prime services risk (PSR) unit was not adequately managing Archegos portfolio risk. But when they followed up again with PSR, they were told that progress was being made.
In January 2021 Archegos’s internal credit rating at Credit Suisse was downgraded from BB- to B+, due to an increase in how long it was estimated it would take to liquidate its positions.
Archegos’s risk limit breaches continued to grow. The bank asked Archegos for $750 million in additional margin in February 2021. Archegos posted $500 million.
The bank also came up with a new margin proposal for Archegos, which would have required it post more money.
On Feb. 23 they contacted Archegos to discuss it.
“The written proposal was sent to Archegos the next day
but Archegos ignored it despite repeated follow ups from Credit Suisse”.
The bank continued to chase Archegos on the dynamic margin proposal; the business scheduled three follow-up calls in the five business days before Archegos’s default, all of which Archegos cancelled at the last minute.
During the weeks that Archegos was “considering” this proposal, it began calling the “excess variation margin” it had historically maintained with Credit Suisse.
Between March 11 and March 19, and despite the fact that the
margining proposal sent to Archegos was being ignored, Credit Suisse paid Archegos a total of $2.4 billion — all of which was approved by risk managers.
From March 12 through March 26, the date of Archegos’s default, Prime Financing permitted Archegos to execute $1.48 billion of additional net long trades.
During the week of March 22nd, the value of Archegos’s positions fell. Its single largest position, ViacomCBS (NASDAQ:VIAC), dropped 6.7% on March 22 and continued to fall in the days that followed.
On March 23, Archegos had over $600 million of excess margin remaining at Credit Suisse but that excess margin was wiped out by market movements and Archegos owed Credit Suisse more than $175 million by the next day, which Archegos paid.
On March 24, another of Archegos’s significant positions, Tencent Music Entertainment Group (NYSE:TME), fell 20%.
Credit Suisse determined it would be making a $2.7 billion call for variation margin the next day.
The matter was escalated to the co-heads of Prime
Services and the head of equities, who scheduled a call with Archegos for that evening to inform it of the upcoming margin call. Archegos told Credit Suisse it could not meet either Credit Suisse’s or any of its other prime brokers’ margin calls on the following day.
That evening, Credit Suisse’s investment bank chief executive and group chief risk officer were informed; it was the first time either recalled hearing about Archegos.
On the morning of March 25, 2021, Credit Suisse issued two margin calls that totalled more than $2.8 billion.
Archegos reiterated that its cash reserves had been exhausted by margin calls from other prime brokers earlier in the week.
On the morning of March 26, Credit Suisse delivered an Event of Default notice to Archegos and began unwinding its
Credit Suisse lost approximately $5.5 billion as a result of Archegos’s default and resulting unwinding of positions.