Credit Suisse Hit By ?5.6m Fsa Fine After Sub-prime Rogue Trading

Credit Suisse has received a record ?5.6m fine from the Financial Services Authority following a scandal in which rogue traders in its investment banking division deliberately mispriced the asset-backed securities they held.

The fine against Credit Suisse would have been as high as ?8m had it not been for prompt action and cooperation by the bank once the trading scandal came to light in February. It is the largest penalty for a breach of FSA principles by a regulated firm, and the second largest fine ever handed out by the watchdog.

The pricing inaccuracies first came to the attention of senior management in February when Credit Suisse was forced to announce a $2.65bn (?1.3bn) write-down and suspended several traders. A month later it confirmed that an internal investigation had found a small number of traders had created pricing errors in their positions through "intentional misconduct". It said disciplinary action had been taken.

The episode ? which centered on securities in controversial investment structures known as collateralised debt obligations (CDOs) ? was highly damaging for already fragile investor sentiment in the banking sector.

Investors have become highly distrustful of credit risk ratings attached to complex investments such as CDOs. A meltdown in the US sub-prime mortgage market last year prompted a flight from credit risk around the world which caught the banks off guard.

The last 12 months have seen write-downs from global financial institutions total $270bn, precipitated by this flight from risk and lingering skepticism about the thoroughness with which banks have been written down the value of assets held on their books.

Today's fine specifically relates to supervision failures by management and to the lack of trader monitoring systems and controls.

In a statement, Credit Suisse chief executive Brady Dougan said: "This incident was unacceptable to me and the executive board. It does not represent the high ethical standards of Credit Suisse. Our overall control framework remains sound and we have taken actions to implement a remediation program to address the findings of our internal review."

The FSA declined to comment on whether it was disciplining the individual rogue traders identified by Credit Suisse's internal investigation. The regulator rarely confirms or denies ongoing investigations. In March the Swiss bank said: "These employees have been terminated or have been suspended and are in the process of being disciplined under local employment law."

Likely action from the FSA against the rogue trader individuals is expected to turn on a technical point ? whether they were directly authorized to trade by the regulator, or whether they traded under the Credit Suisse's FSA authorizations.

Margaret Cole, the FSA's director of enforcement, said the fine against Credit Suisse "reflects our tougher stance on enforcement and our policy of imposing higher penalties to achieve credible deterrence.

"It is imperative, particularly in more challenging financial conditions, that firms have in place appropriate systems and controls to manage their risks. The [Credit Suisse] subsidiaries here failed to take appropriate steps to control the potentially high risk combination in the Structured Credit Group's holdings of exotic products, opaque valuations and high leverage.

"The sudden and unexpected announcement of the write-down had the potential to undermine market confidence."

The only larger fine imposed by the regulator was a ?17m market abuse penalty relating to Shell's mis-stating of proved reserves in 2004.

After today's fine against Credit Suisse, the next largest fine for a breach of FSA principles against a regulated firm was a ?4m penalty handed down to Citigroup in 2005, relating to a controversial European bonds trading strategy. The firm was also required to relinquish ?10m of trading profits. In 2006, Deutsche Bank was fined ?4m in part relating to inappropriate proprietary trading activity. It was forced to relinquish a further ?2.4m to cover losses it avoided during these episodes.