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Credit Suisse Group Special Committee of the Board of Directors Report on Archegos Capital Management

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Credit Suisse Group Special Committee of the Board of Directors Report on Archegos Capital Management CREDIT SUISSE GROUP SPECIAL COMMITTEE OF THE BOARD OF DIRECTORS REPORT ON ARCHEGOS CAPITAL MANAGEMENT July 29, 2021 TABLE OF CONTENTS Page I. EXECUTIVE SUMMARY ................................................................................... 2 A. The CS/Archegos Relationship ................................................................. 3 1. CS’s Early Relationship with Archegos ....................................... 3 2. Prime Services’ Relationship with Archegos .............................. 5 3. Changes in the Relationship Between Archegos and CS ...........7 4. Archegos’s Risk Profile Increases .............................................. 10 5. Persistent Risk Limit Breaches ................................................... 11 6. Archegos Is Discussed at the September 2020 CPOC Meeting ......................................................................................... 14 7. Risk Limit Breaches Continue .................................................... 16 8. CS Takes Steps to Address Archegos Risk ................................ 18 9. Archegos Is Discussed at the March 2021 CPOC Meeting ......................................................................................... 20 10. Archegos Defaults ........................................................................ 22 B. Key Observations ..................................................................................... 23 1. Failure to Act on Known Information ....................................... 23 2. Failure of IB Senior Management to Engage, Challenge, Oversee, or Escalate ..................................................................... 27 3. Failure to Adequately Invest in Risk Culture, Experience, Training, Personnel, and Technology ................... 28 4. Failure of Risk Systems ............................................................... 29 5. Failure to Learn from the Past ................................................... 30 C. Recommended Remedial Measures ....................................................... 31 II. KEY FACTS ......................................................................................................... 32 A. Overview of CS Prime Services .............................................................. 32 1. Prime Brokerage .......................................................................... 33 2. Prime Financing ........................................................................... 37 3. Risk Management for Prime Services ........................................ 44 4. Resources and Responsibilities in Prime Services and CRM .............................................................................................. 49 B. CS’s Early Relationship with Archegos (2003–2016) ........................... 55 1. Beginning of CS’s Relationship with Archegos ......................... 55 ii 2. Regulatory Issues and Transition to a Family Office ............... 56 3. Risk Review of Insider Trading Claims ..................................... 58 4. Archegos’s Trading Profile After Its 2012 Rebranding ........... 64 C. Changes to Archegos’s Trading Profile (2017–2019) ........................... 65 1. Archegos’s Portfolio in 2017 ....................................................... 65 2. Archegos’s Portfolio in 2018 ....................................................... 67 3. Archegos’s Portfolio in 2019 and Changes to Swap Margins ......................................................................................... 69 D. Mounting Red Flags (2020) ..................................................................... 73 1. Archegos’s Portfolio Becomes Significantly Long-Biased ....... 74 2. Archegos Continually Breaches PE and Scenario Limits ........ 77 3. Similarities with Past Risk Failures ........................................... 89 4. Archegos Is Reviewed at the September 2020 CPOC Meeting ......................................................................................... 92 5. After CPOC Review, CS Fails To Reduce Archegos’s Counterparty Risk ....................................................................... 96 6. Dynamic Margining in Prime Financing ................................. 101 E. Extreme Appreciation and then the Crash (2021) .............................. 103 1. Red Flags Continue to Mount ................................................... 103 2. CS Attempts—and Fails—to Implement Dynamic Margining ................................................................................... 115 3. CPOC Discusses Archegos in March 2021 .............................. 117 4. Nothing Changes After Archegos is Discussed at CPOC ....... 120 5. Archegos’s Portfolio Collapses the Week of March 22, 2021 ............................................................................................. 122 6. Failure to Escalate Beyond CPOC ........................................... 123 7. Archegos Defaults and CS Struggles to Unwind Archegos’s Positions .................................................................. 125 III. KEY OBSERVATIONS .................................................................................... 129 A. The Business Failed to Understand and Appreciate the Magnitude of the Risks Posed by Archegos’s Portfolio. .................... 130 1. Concentration ............................................................................. 130 2. Leverage ...................................................................................... 131 B. The Business Missed Numerous Opportunities to Right-Size Archegos Risk ......................................................................................... 133 1. Contractual Rights ..................................................................... 133 iii 2. Credit Limits .............................................................................. 134 3. Dynamic Margin ........................................................................ 134 4. Variation Margin ....................................................................... 135 5. Additional Exposure .................................................................. 135 C. CS Failed to Manage Prime Financing in the United States ............. 137 D. Risk Failed to Understand and Appreciate the Magnitude of the Archegos Risk and Did Not Effectively Challenge the Business ................................................................................................... 138 E. CS Failed to Escalate the Increasing Archegos Risk .......................... 140 F. CS Lacked a Strong Risk Culture and Failed to Invest in Risk Management ........................................................................................... 144 1. Personnel .................................................................................... 144 2. Technology (the Business) ......................................................... 146 3. Technology (Risk) ...................................................................... 147 G. Remote Booking Does Not Appear to Have Impeded Risk Identification .......................................................................................... 148 H. The Reputational Risk Process Was Flawed and Ineffective ............ 150 I. The Archegos Default Surprised CS .................................................... 151 J. CS Failed to Learn the Lessons of Past Failures ................................ 152 IV. RECOMMENDED REMEDIAL MEASURES .............................................. 153 A. CS Leadership, Management Oversight and Staffing ........................ 154 1. CS Should Revamp Its IB Leadership ..................................... 154 2. CS Should Prioritize Hiring Experienced Risk Managers .................................................................................... 154 3. CS Should Evaluate the Adequacy of Risk Management Staffing ........................................................................................ 155 4. CS Should Evaluate Whether Senior Managers Are Overburdened ............................................................................ 155 B. Clearly Defining Roles and Responsibilities ........................................ 156 1. CS Should Define Prime Services Roles and Responsibilities ........................................................................... 156 2. CS Should Underscore First Line of Defense Responsibilities ........................................................................... 157 C. Strengthening Existing Processes to Protect CS ................................. 158 1. CS Should Improve Risk Discipline and Enforce Risk Limits .......................................................................................... 158 2. CS Should Transition Clients to Dynamic Margining ........... 158 iv 3. CS Should Expand Its Consideration of Reputational Risk .............................................................................................. 159 D. Focus on Counterparty Risk: Risk Appetite, Governance, Processes ................................................................................................. 159 1. CS Should Re-Examine its Counterparty Risk Appetite and Controls ............................................................................... 159 2. CS Should Revamp Its Counterparty Risk Processes ............ 160 3. CS Should Improve Its Counterparty Risk Governance ....... 161 E. Improving the Quality of Risk Information and Access .................... 162 1. CS Should Improve the Presentation and Quality of Credit Exposure Information
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