Structured Products Americas Awards 2016
The Credit Suisse of 2015 offers a perfect case study in how a structured products business can thrive in the face of adversity.
The Swiss dealer has been rocked by a series of market, regulatory, and reputational shocks over the past 12 months, and is in the midst of an extensive restructuring exercise - including the divestment of its US private banking arm, which is one of its key retail distribution channels.
Yet Credit Suisse has proven adept at converting these challenges into opportunities. In 2015, its US structured notes issuance grew 4% year on year in aggregate across the registered note, Section 3(a)(2) unregistered note and offshore paper segments. It now boasts a 13% market share in the registered space.
The bank also defied the market dip in exchange-traded notes (ETNs), racking up a 20% growth in assets under management in a year when the market as a whole declined by nearly the same amount - from $26.7 billion to $21.4 billion, according to Bloomberg data.
"2015 was when we really started to hit our stride and saw some of the plans we put in place in 2013 and 2014 come to fruition. Our growth is the result of the 20 new registered investment advisers (RIAs) we onboarded in 2014, and our success in onboarding every major US private bank - a process completed earlier this year," says Elaine Sam, head of structured notes distribution at Credit Suisse in New York.
The head of structured products at one private bank that was onboarded by Credit Suisse describes its range of issuer callable notes as "a particular area of strength".
More long-standing partners are not short of praise, either. "Their pricing has been very strong. They are one of our strongest providers, and, given our best-execution restrictions, being a strong pricer means we do a lot of flow with them," says a portfolio manager at a US private bank.
The strength of Credit Suisse's franchise rests on its unparalleled capabilities in structured notes. To a degree, this was a product of necessity, as the bank has - until very recently - lacked a certificate of deposit (CD) platform from which to issue into the mass market.
CDs are the ‘go to' wrapper for US retail investors, who find their relative simplicity and attached Federal Deposit Insurance Corporation guarantee appealing. An issuer needs a US retail bank counterpart to act as deposit taker, though, which is something Credit Suisse had previously failed to acquire.
But in January 2016, it struck an agreement with Wells Fargo to issue the Credit Suisse Retirement Index in a Wells Fargo CD wrapper. The CDs have been distributed in various broker-dealer and wealth management channels since February.
"It's been a structural gap we've had, and as a result there are certain retail channels we have been unable to access. Because of this we knew we had to be really strong in the areas we could compete in - which for us is structured notes. The callable note suite of products in particular was driven by our internal private bank. Because we built a position there in our books, we became comfortable pricing these short-dated issuer-callable notes for third parties as well," says Credit Suisse's Sam.
One client at a US broker-dealer says the bank excels in short-dated volatility trades and callable notes, and has in the past few months closed a number of longer-tenor deals as its credit spread has widened: another example of the business turning a hindrance into a help.
The bank is not a one-trick pony, however. It has also looked to push into the insurance sector, and the burgeoning fixed indexed annuities (FIA) market has provided especially fertile ground. Building on momentum from 2014, when it launched the Credit Suisse Tactical Multi Asset Index, which was licensed by annuity giant Phoenix Wealth Management, the Swiss bank has invented a new crediting methodology for FIAs, dubbed SmartTarget.
The methodology mirrors the portfolio rebalancing approach of a pension fund manager, aligning the end-investor's exposure to an underlying index with their declining risk tolerance as retirement nears. The aim is to minimise the risk that the investor's FIA account value will decline immediately before retirement, when there is no time for a market uptick to reverse losses. Credit Suisse is in talks with several insurance carriers about adding SmartTarget options to their FIA stables.
The bank has also enhanced its offering in instruments it dubs daily redeemable notes (DRNs).
"These are ETNs without the exchange," says Credit Suisse's Sam. "The DRN contractually guarantees daily liquidity, so you can trade it like a stock. Some clients prefer the DRN route because they don't want their product listed. In one trade, we sold a DRN linked to our Managed Futures Liquid Index to an asset manager client who preferred this format to an ETN because of the confidentiality it provided," she adds.
It has been in traditional ETNs, however, that Credit Suisse scored its greatest success. The franchise has hoovered up assets across the Americas, catapulting it to number-two issuer status, the bank says.
This feat validates the firm's 2014 partnership with Velocity Shares, a volatility ETN specialist, which has seen the bank's assets under management (AUM) grow by 41%.
A considered approach to risk recycling is at the heart of the franchise, says Dan McNeill, head of US equity derivatives at Credit Suisse in New York.
"We have sophisticated systems to handle the daily creation and redemptions flows, plus the end-of-day hedging with Vix futures that underpin these products. Our goal is always to maintain a flat position as much as possible. We like the fact that these products diversify our revenue sources by adding an AUM-accrual-based revenue stream, and we aim to reduce the risk of those products as much as possible so we can gather the fees and avoid trading losses," says McNeill.
While Credit Suisse's private bank is winding down as part of a firm-wide strategic reorganisation, existing clients say this could be a blessing in disguise.
"It does not affect the business we do. Sometimes when you disassociate yourself from your own private bank, you become stronger. The leadership [at Credit Suisse] is best in class, so they will be able to transition," says the portfolio manager at the US private bank.
An executive in product management at a leading RIA concurs, saying he's seen no deterioration in terms of the bank's competitiveness of product or pricing following the divestiture.
Credit Suisse's McNeill also insists the structured products business isn't going anywhere, despite the regulatory headwinds imposed by the Federal Reserve's forthcoming implementation of the Financial Stability Board's total loss-absorbing capacity framework.
While other European banks - notably Barclays - have curbed their reliance on structured note funding over the past 12 months, it's understood Credit Suisse has no immediate plans to dramatically curtail issuance.
For Credit Suisse's Sam, 2015 is the year all the pieces of the structured products puzzle finally came together. "We want to continue to drive our growth through all the different distribution channels. The private bank channel remains a priority. In the broker-dealer space, we now have a CD provider and that will be a key focus in the year to come. There's a lot of content we can show to the Street which we may not have had the right wrapper for in previous years - now we do," she says.
The week on Risk.net, July 7-13, 2018Receive this by email