Credit Suisse Says Talks Advancing on Revamp of Bonus Derivative

Credit Suisse Group AG, the second-biggest Swiss bank, said it’s in advanced discussions on the restructuring of a derivatives transaction the firm used to award more than 5,500 employees part of their 2011 bonuses.

The need to revamp the so-called Partner Asset Facility 2 arose because the Basel Committee on Banking Supervision said last year in a paper on counterparty credit risks under the new Basel III rules that a hedge of such exposure isn’t valid if a bank is providing a liquidity facility or another kind of credit enhancement to the provider of the hedge.

Credit Suisse said last year that it bought a credit default swap from a third party to hedge the $11 billion senior tranche of the derivatives against the potential for future swings in counterparties’ credit spreads, while at the same time agreeing to provide funding to this third party in “certain circumstances.” The bank, which used the deal to help it reach the target of risk-weighted assets reduction faster, can either restructure it or terminate the transaction entirely.

“We’ve been in negotiations with a number of people over the course of the last three months in terms of how we actually restructure that senior funding,” Chief Financial Officer David Mathers said on a conference call with analysts today. “Those discussions are progressing well, they’re extremely advanced and I think we would probably expect to conclude that in the next few months.”

Deferred Compensation

The Zurich-based company hadn’t disclosed the amount of risk-weighted asset reductions it achieved through the PAF2 transaction, and Mathers today declined to say what the effect on risk-weighted assets would be if the bank canceled it.

Credit Suisse kept the so-called first-loss piece of about $500 million of the transaction, which covers about $12 billion in notional exposure from derivative counterparty risks. It awarded about $800 million in structured notes linked to the derivatives to the employees as part of their deferred compensation.

PAF2 was hatched as a sequel to the original Partner Asset Facility, an investment fund set up for staff in 2008 during the depths of the U.S. financial crisis, where employees got shares in a $5.05 billion pool of junk-grade loans and bonds backed by commercial mortgages.

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