Derivatives house of the year, Asia ex-Japan: Credit Suisse

Asia Risk Awards 2018

Stephane Goursat
Stephane Goursat
Credit Suisse

Financial markets have witnessed a subtle transformation in the past 12 months, with buoyancy giving way to some uncertainty amid the looming macro challenges. In Asia, home to the biggest emerging markets, the changes have been more marked.

The unfolding scenario posed a challenge not just to investors and corporations, but also to derivatives providers, as very few could play both sides of the market with the flair this demanded. Credit Suisse, with its global structured products advisory reach and cross-asset solutions platform, has topped that league.

More importantly, its offerings have reached a diversified clientele. Products have not just been engineered to serve institutional investors, but have hit the sweet spot right up to family offices, wealthy investors and entrepreneurs. That has been made possible by Asia-Pacific chief executive officer Helman Sitohang’s push to expand the collaboration between research, investment banking and private banking arms across product manufacturing and technology investment.

“Our Asia-Pacific global markets business strategy can be summarised as one where we are not just maximising our global footprint but are taking further steps to also offer best-in-class local coverage,” says Stephane Goursat, head of investment solution sales for the region. “We have leveraged on our cross-asset platform to provide institutional-type solutions to private banking clients. Our unwavering commitment to technology investment has played a big role too.”

Some of the key innovative risk management solutions over the past year from the bank combined derivatives expertise, an understanding of the relevant regulatory landscapes and an ability to structure legally complex products.

One fixed income hedging product Credit Suisse came up with last year reveals the depth of the bank’s capabilities.

As a nearly four-decade-long bond market bull run hurtled to a close and the US Federal Reserve’s monetary policy tightening sent yields higher, fixed income investors’ worries surged.

The US Federal Reserve has raised rates twice this year and seven times since tightening began, while securities purchased by the Fed, the European Central Bank and Bank of Japan has dwindled. 

Futures are fully pricing in another rate hike this month, while the odds of an increase in December have breached 70%. The yield on the policy-sensitive two-year Treasury yield hit a 10-year high above 2.7% in early September.

As rate rises loomed, concerned institutional investors approached Credit Suisse last year looking to hedge the interest rate risk of their core investment-grade bond portfolio. Those investors across Asia were looking at ways to implement the protection without incurring the excessive cost associated with traditional rates hedging strategies, such as interest rate swaps and long-dated swaptions.

Credit Suisse worked for several months in partnership with its clients to develop a systematic fixed income overlay strategy aiming to mitigate the risk associated with the end of the US Fed’s quantitative easing cycle.

The bank’s strategy combined a long-short strategy linked to futures and swaps – based on tactical and macroeconomic signals, allowing it to deliver returns when clear interest rate trends arise – with an interest rate volatility exposure, allowing it to deliver returns when rates go sideways.

This strategy allows clients to protect against increasing interest rates while generating some carry. It also provides returns if rate rises are slower than currently expected – a very likely scenario as global growth wanes and the US breaches its 2% inflation target.

“The solution was an example of Credit Suisse’s out-of-the-box thinking to find innovative, and cost-efficient, rates hedging ideas,” Goursat says.

The strategy has delivered more than 6% annualised returns in the past year for a volatility of 1.5%, while the Fed fund target rate increased by 0.75%.

credit-suisse-zurich

The success of the strategy, which was borne in the region, has found more clients in Asia. The bank has closed similar deals with its European and US clients now, according to Goursat.

Another poster trade during the past 12 months was the one that helped insulate a number of institutional investors from the equity markets selloff in February. The strategy delivered a 9.55% return on February 5 – the same day the S&P 500 plummeted by 4.1% and the CBOE Volatility Index jumped 20 points.

Investors took a view in early 2017 that global equity markets were peaking following the post-US election surge and wanted to hedge their exposure to a possible downturn. Credit Suisse proposed a transaction linked to a risk premia index designed to react to different market cycles. The index consisted of three asset buckets, which, when put together, provided a hedge for the client’s exposure while offsetting the risk of negative carry resulting from the mark-to-market payments required over the lifetime of the trade.

In commodities markets, the bank saw increasing investor interest, due to a far lower correlation with other asset classes and higher perceived fundamental value in the asset class. Commodities are also viewed as an asset class for diversifying multi-asset portfolios, and for providing a hedge against inflation.

Credit Suisse came up with a differentiated absolute return commodity strategy based around liquid futures constituents. It was an absolute return investment driven by a discretionary scoring system and supported by a systematic risk allocation process, delivered to investors in the region in order to diversify away from more traditional commodity exposures.

Such bespoke solutions for clients have been central to the bank’s success in derivatives markets in the region. A deep understanding of clients’ balance sheets, risk tolerance and regulatory constraints have all come to the fore.

The bank has eschewed the one-size-fits-all outlook and instead worked alongside its clients to design highly customised risk management solutions. Most of these solutions have originated here and are also being exported to our global business

Stephane Goursat, Credit Suisse

“We’ve established ourselves as a top provider of bespoke solutions for institutional clients and asset owners spanning asset managers, pension funds, sovereign wealth funds and financial institutions,” says Goursat. “The bank has eschewed the one-size-fits-all outlook and instead worked alongside its clients to design highly customised risk management solutions. Most of these solutions have originated here and are also being exported to our global business.”

The increased focus on such quantitative strategies across asset classes in the region has meant adding more resources to the team. Clément Florentin, global head of cross-asset quantitative investment structuring, moved from London to Hong Kong in September. Overall last year, the bank increased its Asia-Pacific headcount across both markets and wealth management to 7,230 from 6,980, largely in technology and operations.

The enhanced investment is reflected in Credit Suisse’s rollout of Sprint 2.0, its stock picking methodology. This has already proved to be a commercial success for the bank, with more than $1 billion in notional of Sprint 2.0-linked products sold in the first half of 2018 alone.

Another example is Quantum, a platform for actively rebalanced indexes providing a unique front-to-back experience through features such as automated reporting, price calculation and booking.

Credit Suisse says Sprint improves the quality of stock selection for clients through its filtering methodology. With the help of the bank’s equity research, stocks are first picked on the basis of fundamental and technical factors. The surviving stocks – those with a neutral or positive view – are then filtered through the bank’s proprietary model, Holt, using first value and momentum performance metrics and, secondly, probability of default. A final filter conducts a volatility analysis, identifying which stocks have a reasonable level of implied volatility to ensure the product will be a yield enhancer.

Quantum, launched in the second quarter of this year, allows customisation of index rebalancing. It includes a well-established master index framework and a front end user-facing portal to handle rebalance requests from strategy sponsors. The portal connects with other in-house engines such as: Canary, which calculates index value; Ibis, which publishes index value; Rooster, which controls holiday schedules; Kiwi, which stores historical data; Koala, which manages trade execution; and Peacock, which publishes performance reports.

Such initiatives have provided the platform and content to boost the integration between the global markets business, research and the wealth management unit. This is pivotal in channelling the recommendations of more than 250 analysts globally, spanning 3,000 companies, to both institutional and private banking clients.  

Credit Suisse used the platform to inform its investment house view and deliver a range of structured products, including principal-protected products. Similar partnerships have been executed with external asset managers, allowing them to manage indexes, wrapped into structured products for their clients.

“Credit Suisse leverages on its cross-asset platform, to provide institutional-type solutions to its private banking clients, through content and delivering platform,” says Florentin.

The platforms have also helped the bank recycle the large flows across asset classes through its private bank and with asset owners and hedge funds.

Examples of products include principal-protected notes linked to mutual funds, where the bank has been delivering a large amount of volume to clients over the past year. The success of this product has been driven by the performance of such mutual funds, an appeal for an underlying actively managed in a challenging environment and pricing.

With the bank’s global markets business offering large amounts of options on a selected number of top managers, the trading books ended up being long on the delta of mutual funds, which consumes balance sheet and funding, while short on volatility. 

Ken Pang
Ken Pang

The bank hedged its risk by offloading its delta through renting balance sheets from third parties or other vehicles, and by risk-recycling its volatility through hedging with volatility-linked structured products.

Single stocks were another hot product. The private bank traded reverse convertibles on single stocks, which leaves the books long single-stock volatility. Credit Suisse addressed that through volatility dispersion trades, including geographic dispersion, and knock-in correlation swaps, allowing it to hedge its books.

For those clients who also sought protection in the currency markets, the bank came up with gap risk modelling for repacks with credit and foreign exchange options overlaid on the underlying assets. Another innovative credit-currency hybrid model was implemented that includes the impact of forex credit correlation to make sure gap risks on repack trades were estimated and booked correctly.

“Our cross-asset derivatives platform is central to our strategy in Asia-Pacific, allowing us to provide differentiated content and risk management solutions both to our own private banking clients, third-party distributors and institutional clients,” says Ken Pang, head of markets for the region. “Substantial investments in technology and talent are driving growth both in the Apac region and globally.”

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