Credit Suisse to exit prime brokerage following Archegos Capital losses

The bank will ditch the majority its prime services business after the collapse of Archegos cost it $5.5 billion and led to an in-house risk review.

Credit Suisse says it will all but exit prime services following the fallout from the collapse of Archegos Capital Management which cost the Swiss-bank $5.5 billion and forced a wholesale review of risk management across the business.

On the day of its third quarter earnings reveal, the bank said it will now place risk management at the core of its bank and focus on a “culture that reinforces the importance of accountability and responsibility”.

Two smaller parts of the prime services – Index Access and APAC Delta One – will remain active.

In addition, Credit Suisse will reduce its long duration structured derivatives book, while exiting approximately 10 non-core Global Trading Solutions markets, which it believes will lead to an expected capital reduction of 25% from 2020 levels by next year .

Starting from January next year, the Group will be reorganised into four divisions with a “simplified model” – wealth management, investment bank, Swiss bank, and asset management.

The new leadership structure will be announced in the near future, the bank confirmed.

Credit Suisse has operated as one of the world’s largest prime brokers, but racked up the biggest losses of all the banks entangled in the Archegos Capital Management. There were over $10 billion in losses across the Street, with Credit Suisse accounting for more than half.

A report from Law firm Paul Weiss, Rifkind and Warton following the unravelling of the collapse highlighted Credit Suisse’s repeated failure to address continuous red flags from potential exposure limits put in place and manage margin levels attached to swap positions.

Since then, Credit Suisse’s shareholders almost unanimously approved the appointment of two new risk-focused members of its board of directors in October, while the market awaited the latest news from the Swiss-bank in its third quarter earnings.

“I am confident that with the measures we announced today, we will be better positioned to leverage our strengths, control our risks and further build connectivity with the Wealth Management division, bringing the whole of our bank to all our private, corporate and institutional clients around the world,” said Thomas Gottstein, Group CEO.

In March 2021, a family office run by Bill Hwang – Archegos Capital Management’s -long position in two stocks – ViacomCBS and Discovery – soared, where it was able to secure most of its financing from Credit Suisse, according to a report by the Wall Street Journal.

As the share price of these stocks began to fall, it triggered margin calls that Archegos failed to meet.

What followed was a $20 billion fire sale as the banks, or at least some of them, rushed to sell off the fund’s positions to make back that cash. As the dust settled, Credit Suisse reported $5.5 billion in losses tied to Archegos, while Nomura tallied nearly $3 billion, and Morgan Stanley just under $1 billion.

“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 from Paul Weiss, Rifkind and Warton. “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’s “continuous” potential exposure limit breaches throughout the end of last year and into the beginning of 2021, the report added, and highlighted that Credit Suisse agreed to reduce Archegos’s 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. 

According to reports, Credit Suisse only made $17.5 million from its relationship with Archegos in the preceding year.

Elsewhere, Nomura is planning to close its cash prime brokerage businesses in the US and Europe, dealing a major blow to its global ambitions. 

While Credit Suisse is bearing the brunt of the collapse, there are much wider consequences happening for both hedge funds and other prime brokers.  

For more information on the fallout of the Archegos Capital Management collapse, read our feature here.

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