Credit Suisse AT1 Write-off Leads to Billions in Losses for Creditors – Is it Time to Review Your OMS Compliance Rule Library? 

The recent turmoil in the US financial markets and the collapse of Silicon Valley Bank and other regional banks have caused significant volatility. Internationally, UBS's acquisition of Credit Suisse aims to restore confidence in the Swiss banking system.  

Credit Suisse's AT1 Write-off

As part of its takeover by UBS, Credit Suisse was instructed by FINMA to write down 16 billion Francs ($17.5 billion) worth of Additional Tier 1 bonds (AT1s). This write-down is the most significant loss ever recorded in the AT1 market and serves as a reminder that AT1s were designed to absorb losses.  

AT1s, also known as contingent convertibles or CoCos, are hybrid securities designed to absorb losses if a bank's capital falls below a predetermined threshold. These CoCos function like traditional bonds but can convert into equity or stock to absorb losses when triggered.  

Credit Suisse's write-off of AT1s has sparked controversy, with some creditors arguing that it breached the capital structure hierarchy of claims. While AT1 bondholders suffered losses, equity shareholders emerged relatively unscathed. Frustrated contingent convertible investors have filed a lawsuit against FINMA, alleging unfair treatment.

Evaluation of CoCos

Despite the controversy, CoCos have performed as intended, helping prevent a government bailout for Credit Suisse. Contingent convertible bondholders have profited from high-yielding coupon payments. However, it's essential to consider the potential impact of availability bias on contingent convertible investors' expectations based on past events.  

Reviewing OMS Compliance Rule Library

Order Management System (OMS) compliance rules often aim to limit exposure to convertible securities, including contingent convertibles. To mitigate risk, it may be necessary to implement sub-limit compliance rules specifically for contingent convertibles. This ensures better risk management and reduces concentration risks within portfolios.  

Conducting Risk Assessments and Incident Response Plans

Regular risk assessments associated with compliance activities are crucial. Implementing controls to reduce non-compliance risks is essential. Developing and managing an incident response plan allows quick and effective responses to compliance breaches and market cycles. Regularly evaluating risks associated with instruments like contingent convertibles and refining compliance rules is vital in navigating the financial landscape.  

In conclusion, maintaining a robust OMS compliance rule library is vital for accurate risk assessments. You can navigate market volatility effectively by proactively addressing compliance risks and continuously improving risk management practices. If you require assistance, contact IMP for expert guidance and support. 

Co-authored by Nicolas DiSciullo and Hailey Ford.

Sources: 
https://www.reuters.com/markets/why-markets-are-uproar-over-risky-bank-bond-known-at1-2023-03-24/ 
https://www.ft.com/content/47168c08-f09e-4ddb-905f-3c368c4f2b05  
https://www.ft.com/content/3971e4c8-ca3e-11de-a3a3-00144feabdc0  
https://www.msci.com/www/blog-posts/coco-bonds-write-down-risk-is/03730845628