Precious metals house of the year: Credit Suisse

Energy Risk Awards 2023: Precious metals desk provides liquidity and keen pricing during market turmoil with advanced AI-enhanced risk management

Francesco Schiavo, Credit Suisse

Credit Suisse’s precious metals business – in common with much of the Swiss bank’s operations – faces a several months-long transition period, following the merger of Credit Suisse with UBS in March. For now, it’s business as usual, with the merger expected to complete in the second quarter of 2023, according to UBS.

Despite this upcoming transition, the continuing operation of Credit Suisse’s precious metals desk and its stand-out performance in 2022 means it has been selected as the winner of Energy Risk’s 2023 Precious metals house of the year award. Throughout the volatility of last year, the Credit Suisse precious metals desk was able to respond rapidly to changing market conditions, providing much-needed liquidity and competitive pricing to its clients. This was enabled by its advanced risk management framework, cutting-edge technology and deep presence throughout the market.

“We stand out against the competition through superior technology, exceptional risk-warehousing abilities and the integration of our capabilities in a single platform,” says Aurélien Gleyze, head of FX and precious metals spot for EMEA at Credit Suisse. “What sets us apart is the agility of our platform, and our ability to react to different market conditions to offer tailored solutions.”

Certainly, 2022 offered a challenging and often very attractive environment for precious metals trading. The war in Ukraine prompted a stampede into gold as a safe-haven asset, while, at the same time, the buy-and-hold behaviour caused liquidity to evaporate. In this testing environment, the precious metals desk’s risk-management framework proved resilient.

Key to this, says Gleyze, was sophisticated AI-enhanced pricing and a cross-asset approach to risk management. The bank’s AI pricing engine allows traders to factor in dozens of related markets and datapoints to enhance its view of where the gold price is heading, he says.

“As a human trader, I probably use two or three inputs into my price. By contrast, our AI engine uses more than 100 different inputs, which it recalculates every few milliseconds,” he says. “It doesn’t think differently to a human trader, but it’s doing it better and faster than any human trader could manage.”

This edge on pricing gives Credit Suisse capacity to keep internalising risk and provide a consistent service to clients when liquidity deteriorates. That ability to warehouse is enhanced, says Gleyze, by how the pricer manages the related risk. “That we’ve merged FX with precious metals gives us the ability to offset risk against various asset classes,” he explains. For example, a long position in gold is effectively a ‘risk-off’ trade, which could be offset by a ‘risk-on’ trade, such as long position in an emerging markets currency, he says.

 

Franklin_Koshaj, Credit Suisse

Franklin Koshaj, FX & commodities sales and advisory, also stressed Credit Suisse’s platform integration as another point differentiating the bank’s precious metals offering. Credit Suisse offers trading, advisory, custody and lending solutions for precious metals, a feature that particularly helped producers to take advantage of high prices last year. A popular option for producers involves buying put options, although the upfront cost of the options, the costs of funding margin requirements and the operational complexity of bringing physical metal to market all create obstacles.

Rather than require producers to tie up cash in over-the-counter margin collaterals or pay upfront option premia, the desk devised a zero-cost structure where the put option is financed by adding a knock-out option and selling a call. Derivatives strategies were backed mainly by physical gold or silver held with Credit Suisse.

“Our clients took advantage and hedged future production at levels around all-time highs, with flexibility and cost-efficiency,” said Koshaj. “They were able to sell part of their annual production at a premium of more than $200 an ounce above prevailing market prices.”

The bank also innovated to enable institutional investors to gain exposure to precious metals markets. “These funds are rarely able to trade physical commodities, so we were asked to provide cash-settled solutions instead,” says Francesco Schiavo, global head of FX and precious metals options trading. The bank structured several non-deliverable options trades, but this created challenges due to the mismatch in expiry times between the cash-settled OTC contract at 9 am and the London Bullion Market Association price fix in the afternoon, during periods of low interbank liquidity.

“We worked very closely with our spot execution desk to offer fixing services at extremely competitive prices … based on their offsetting with other internal orders. We could then pass this advantage onto our clients,” says Schiavo.

Close relationships with its clients helped the precious metals desk successfully navigate recent volatility. “We go the extra mile for our clients when they need us most, and I think they value that service. The unwavering support we’ve received from clients is something we really appreciate and never take for granted,” he adds.