Credit Suisse AT1 bonds: Switzerland’s Federal Administrative Court ruling

A few observations on the ruling this week from Switzerland’s Federal Administrative Court concerning the wipe out of c. SFr16.5bn Credit Suisse AT1 securities, including how encouraging developments in FinTech/AI suggest we may see less equivalent disputes in the future:

• The regulatory ambition post GCC to create a uniform AT1 product across the EU (including a substantially similar instrument in Switzerland) never sat easily with the highly divergent corporate law and constitutional frameworks underpinning them (just witness what went before: Silent Participations, Partizipationskapital, TSS, Participación Preferente, Preference shares, PIBS, Profit certificates, to name but a few).

  
  

• This ruling deemed the PONV trigger clauses that FINMA previously approved in AT1 offering circulars (OCs) were incompatible with the Capital Adequacy Ordinance (ERV), which sets out the Swiss regulatory framework for bank capital adequacy. The latter gave FINMA greater flexibility to call for a write-down of AT1 than was drafted into the OCs it is maintained. Something went wrong.

  
  

•  The word ‘commoditisation’ should never have been used regarding the market for highly structured products like AT1, from wherever issued, owing to a variety of risks, including the possibility of regulatory rubber stamping as new issue volumes grow.

  
  

• How the detailed interconnecting clauses in these offer documents can ever be effectively analysed and interpreted in the frenetic cauldron of a weekend resolution has never been clear.
  

• Looking to the future, moves towards automated document drafting embedding regulatory, legal, tax and other relevant compliance, and especially RegTech developments to accurately test new offer circulars against these requirements is promising.

The market now awaits the outcome of the appeal to Switzerland’s Federal Supreme Court - the uncertainty goes on!