Equity derivatives house of the year: Credit Suisse

Asia Risk Awards 2020

Min Park, Credit Suisse

In 2019, Credit Suisse’s Asia structuring team began working with a set of key investors on various defensive investment strategies. By early March this year, as Covid-19 was declared a pandemic and global markets descended into panic, the bank’s foresight proved invaluable.

“This is definitely an unprecedented year,” says Min Park, head of Apac sales. “Amid the Covid-19 pandemic, we have responded quickly to market movements and worked closely with our clients to come up with innovative defensive strategies.”

One example is a tail hedge programme for the multi-asset portfolio of a large strategic investor, developed last year. To reduce the bleed from the tail-hedge component, the programme included a financing leg that harvested ‘carry’ through inclusion of a diversified, risk-weighted selection of risk premia strategies across asset classes which, importantly, exhibited low correlation to equities.

The portfolio of risk premia strategies not only worked to limit the bleed from the tail hedge bucket; it also generated a consistent and sizeable alpha to the portfolio on top.

Then Covid-19 happened. The unprecedented brutality and breadth of the equity market sell-off at the end of the first quarter caused many investors to re-investigate the potential benefits of tail-risk hedging programmes. This led to a huge surge in hedging demand from the bank’s clients.

Credit Suisse was able to respond rapidly, thanks largely to the frameworks it had put in place. A large number of enhanced-hedging strategies were developed in collaboration with the client. Many of these are classified as intellectual property though, so the bank is unable to disclose details.

Broadly, however, the bank says it worked to restructure its existing defensive strategies in accordance with the new market realities by, for example, increasing the tail hedge bucket.

“We started working with clients on smart hedging solutions from a very early stage,” says Stephane Goursat, head of institutional solutions sales for Asia at Credit Suisse. “For example, quantitative investment strategies were used to construct equity volatility tail hedges, financed by carry. When crisis struck, we quickly adapted these.”

Another example of the bank’s quick work on solutions to help its clients weather the Covid-19 storm was the design and launch of a more accessible dispersion strategy.

In a classic dispersion strategy, investors look to profit from relative value differences in volatilities between a particular index and its underlying stocks, knowing that markets tend to underestimate the dispersion – that is the range of possible returns – between the two.

Stephane Goursat, Credit Suisse

Drawing on its market-leading structuring and trading expertise, Credit Suisse built a modified strategy for its Asia institutional clients, adapted in order to fit with the new volatility regime emerging at the beginning of the Covid-19 market panic.

Dispersion strategies can be difficult to access for some investors, however, given that they typically come in the form of complex, opaque over-the-counter formats that are difficult to value.

Credit Suisse’s structuring and trading team devised a solution to broaden access to such dispersion strategies by offering access through a single index – something, Goursat says, was “very well received by investors who could not access this correlation carry before”.

Maintaining such an index is very operationally intensive, Goursat says. The index typically holds in excess of 2,000 options positions at any one time, positions that would be near-impossible to manage for a bank lacking the automated trading infrastructure Credit Suisse has in place.

“You need to have a system that allows you to handle hundreds of options, and the delta-hedging of these options,” says Goursat. “This is definitely an operational challenge, and the key is being able to deploy the right technology.”

The performance of the index during the market crash in the first quarter of this year was nothing short of phenomenal. Between February 19 and March 23, a period when global stocks were in freefall, the dispersion index posted a stunning 7.5% gain. Those gains were then retained when stocks subsequently began to bounce back, with the index up a further 0.9% between March 23 and June 9.

You need to have a system that allows you to handle hundreds of options, and the delta-hedging of these options. This is definitely an operational challenge, and the key is being able to deploy the right technology

Stephane Goursat, Credit Suisse

Besides these investment innovations for institutional clients, it has also been a very strong year for Credit Suisse’s equity-linked retail structured products business, especially in Japan.

Japanese securities companies are facing an increasingly challenging market in the distribution of equity structured notes, with quote and trade volumes surging and a growing number of new entrants. Credit Suisse has helped these clients scale up their businesses by providing the means to price and place large numbers of orders quickly, often in a matter of seconds.

The key is the dual-wielding of the bank’s two platforms designed specifically for structured notes, both of which cover the most popular underlyings and structures in the Japanese market.

Ocelot, firstly, is a one-stop shop, web-based platform that screens email requests and replies with quotes tailored for clients, typically within 15 seconds.

The second platform, Spirit, meanwhile, aids the marketing and trade execution processes for structured note distributors. Pre-trade documents that match the quote are automatically generated by the platform. Trade execution flow is also fully automated, with distributors able to input a quote and place an order on Spirit, which then generates the trade confirmation automatically, while simultaneously sending risk hedging parameters to the Credit Suisse trader directly for the bank’s own hedging processes.

The combination of these two platform offerings has enabled securities companies to ramp up their structured note distribution of the go-to investment solution for Japanese retail investors.

Reflecting on a rollercoaster 2020, Park says the achievements of Credit Suisse’s equity derivatives business in the past year are all the more meaningful given the circumstances.

“This year’s win is especially significant to us in the backdrop of Covid-19 pandemic – as it’s a strong testimony of our clients’ trust in us, especially during the pandemic,” he says. “By constantly innovating on the structuring, research and platforms, we customise our products to meet our clients’ needs and risk appetite. These are what sets us apart.”