Traders Earning Great Bonuses Through These New Bonds Called CoCos

Traditionally, traders on Wall Street expect to earn substantial cash bonuses at the end of the year, depending on their performance.

However, Credit Suisse recently joined UBS in paying staff partly in contingent capital bonds, or CoCos, which the two lenders have to raise by 2019 to satisfy regulatory requirements.

Quartz gives a good explanation of CoCos, where it is described as a way for a bank to hedge risk. They’re debt, but if certain conditions are met — in this case, if the banks’ capital falls below a certain level — they can be wiped out or converted into equity, propping up the balance sheet. That means CoCos can be risky for the people getting paid in them because their pay could essentially disappear. But they can also be great if the bank is doing well, which is the case now.

Bloomberg reports that contingent capital debt issued by Credit Suisse has returned 6.7% this year, while such notes from UBS have gained 6.6%, Bank of America Merrill Lynch index data show. That compares with 5.9% returns on high-yield bonds worldwide and 6.2% gains on the MSCI World Index of equities.

Paying banker bonuses in CoCos was meant to incentivise them to take less risk to ensure that they didn’t do anything that would make their CoCos vanish. So far, it seems to be working and paying off for both banks and traders. Trust Wall Street to come up with another ingenious way to make even more money!
This article is written by Kabir Singh