Credit Suisse AT1 Fallout Embroils More Japan Brokerages
Comment of the Day

July 12 2023

Commentary by Eoin Treacy

Credit Suisse AT1 Fallout Embroils More Japan Brokerages

This article from Bloomberg may be of interest to subscribers. Here is a section: 

Switzerland’s decision in March to write down the bonds as part of a government-led rescue of Credit Suisse shocked investors in Japan, who bought around 140-billion-yen ($1 billion) worth of the debt. Clients of Mitsubishi UFJ Financial Group Inc.’s securities venture with Morgan Stanley took the lion share of the hit. The debacle in a country that’s trying to push its citizens to invest more has prompted regulators to look into whether the firms properly explained the risks before selling the bonds. 

“In consideration of the product characteristics of AT1 bonds of Credit Suisse Group AG, we have sold those securities to customers to whom we thought the products would be suited, after having sales staff explain about them in person,” an SBI spokesperson said by email, in response to questions about the documents. 

Rakuten Securities Inc. sold the debt through its business partners called independent financial advisers and is “reviewing and inspecting” its sales practices and explanatory materials, a spokesperson said by email. The firm will “continue to follow up” with the buyers and “appropriately respond” should they decide to escalate the issue, she said. 

Eoin Treacy's view

The prospectus for several of the Swiss AT1 bonds included the provision that holders would be wiped out in the event of default. For institutions the onus is on the relevant departments within a bank or fund to read the prospectus. The reality is that generally only occurs after a crisis. Regular consumers are not expected to understand the intricacies of high finance. For them the onus is on the seller. That ensures there will be some difficult conversations but the broader question is how much damage this episode has done to Switzerland’s reputation among international investors.

Switzerland’s giving up of banking secrecy, questioning of neutrality by agreeing to sanction Russia and the doubts around rule of law in the takeover of Credit Suisse all represent question marks for potential investors. The country is no longer a banking powerhouse. As a result it is more reliant on its other primary sectors and government policy reflects that.
The Swiss franc is still a beneficiary of safe haven flows and moved to a new eight-year high against the US Dollar today.

Meanwhile, the Middle East and particularly Dubai, is intent on taking Switzerland’s crown as a reliable place to deposit funds beyond the grasping hands of officialdom. The Dubai Index broke out to new recovery peaks in June and continues to extend the uptrend .

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