Credit Suisse Fined By FINRA, Regulatory Issues Continue

by Trefis Team
Credit Suisse
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Credit Suisse (NYSE:CS) has been fined $1.75 million by the Financial Industry Regulatory Authority (FINRA) for alleged violations related to the short-selling of securities. [1] The FINRA handed down the fine to the Swiss bank within months of announcing a similar penalty for its bigger Swiss competitor UBS (NYSE:UBS). [2] UBS received a notably heavier penalty of $12 million because of the more far-reaching effects of its violations. While the fines are not material from a monetary standpoint, given all of the recent negative publicity surrounding the financial services sector, this bad press is yet another headache for the Swiss banks.

See our complete analysis of Credit Suisse | UBS

We maintain a $33 price estimate for Credit Suisse’s stock and $16 price estimate for UBS, and attribute the 30-40% premiums over current market prices to the pessimistic outlook for banking stocks in the wake of economic conditions and the European debt situation.

Short Selling and FINRA’s Reg SHO

Unlike in a normal, or ‘long’, security sale in which one sells the securities he or she already possesses, in a short sale a person sells securities he or she does not actually own. So before the time of delivery of the securities, the seller either purchases them or borrows them from someone who actually does own the securities.

FINRA Regulation SHO, or Reg SHO, seeks to regulate such short sales by requiring traders to reasonably ascertain that they can arrange to acquire the securities they short sell. Moreover, Reg SHO requires traders to document details about where they intend to obtain the securities from, called the “locate” information, as well as to mark equity sales as ‘long’ or ‘short’ in their systems.

Where UBS and Credit Suisse went Wrong

Equities trading constitutes an important part of the business models for both banks, with the businesses roping in as much as 30% of total revenues under favorable trading conditions in past quarters. But FINRA noticed that the information systems at both banks did not comply with Reg SHO, resulting in millions of violations spanning years of operations.

FINRA came down more heavily on UBS as it had, allegedly, on numerous occasions completed short sale transactions for securities which were known to be difficult to borrow. [2] According to FINRA, this “extended to numerous trading systems, desks, accounts and strategies,” warranting the heavy fine.

While FINRA mentions in its announcements that the banks were unaware of these limitations in their systems, and the subsequent violations, prior to the investigation, it also seems to suggest that the banks have been able to fix or are in the process of fixing the underlying issues. Hopefully the banks have the systems under control now, because continued regulatory issues could tarnish their already-damaged reputations.

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  1. FINRA Fines Credit Suisse Securities $1.75 Million for Regulation SHO Violations and Supervisory Failures, FINRA Website, Dec 27 2011 []
  2. FINRA Fines UBS Securities $12 Million for Regulation SHO Violations and Supervisory Failures, FINRA Website, Oct 25 2011 [] []
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