UBS and CS Mitigate Archegos Risk, the Main Cause of Their Deterioration

Fines of $388 Million to Be Paid in the US and UK

Switzerland's largest bank UBS has agreed to pay fines totaling $388 million (approximately 497 billion KRW) to the United States and the United Kingdom in connection with the margin call crisis caused by the hedge fund Archegos Capital, which was the main culprit behind the collapse of Credit Suisse (CS).

According to major foreign media on the 24th (local time), UBS announced that its subsidiary CS would pay $269 million (approximately 344.6 billion KRW) to the U.S. Federal Reserve (Fed) regarding the so-called Archegos trading incident. For the same matter, it also agreed to pay ?87 million (approximately 152.4 billion KRW) to the Bank of England (BOE).

The Archegos investment failure in 2021, along with the failed investment in the UK’s Greensill Capital, was the main cause of CS’s financial crisis. In 2021, CS entered into total return swap (TRS) and contract for difference (CFD) agreements, which are derivatives, with Archegos, led by Korean-American investor Bill Hwang, and provided funding, but when the stocks invested in with borrowed funds sharply declined, a margin call situation arose requiring additional collateral.

Archegos failed to meet the margin call demands, leading to default, and the financial institutions that had contracts with them suffered losses. U.S. banks such as Goldman Sachs and Morgan Stanley proactively sold the stocks held as collateral to minimize losses, but Nomura and CS incurred large-scale losses.

Financial authorities in the U.S. and the UK viewed CS as partly responsible for the spread of derivative-related damages through its Archegos investment transactions and decided to impose fines, foreign media reported.

[Image source=Reuters Yonhap News]

CS, which had been a problematic player in the European financial sector for years, suffered consecutive blows from the Archegos incident in the U.S. and the failed investment in the UK’s Greensill Capital, which went bankrupt in March 2021, amid a deteriorating business environment due to the COVID-19 pandemic. Its stock price declined due to the performance shock. Then, in March of this year, concerns over its financial stability intensified following the collapse of the U.S. Silicon Valley Bank (SVB), leading to its acquisition by UBS under government mediation.

The acquisition price was 3 billion Swiss francs, with the Swiss National Bank (SNB) providing UBS with liquidity support of up to 100 billion Swiss francs and the government offering guarantees of up to 9 billion Swiss francs for CS’s potential losses. Considering the Swiss government’s unprecedented conditions for market stabilization, CS’s market capitalization of about $8 billion, and total deposits of $230 billion, the deal was overwhelmingly favorable to UBS. However, long-term challenges remain, including market monopoly issues and restructuring of overlapping personnel and infrastructure.

This content was produced with the assistance of AI translation services.