Derivatives house of the year, Japan: Credit Suisse

Tomoyuki Sasai

Credit Suisse has seized market share with Japanese regional banks over the past 12 months. It is a client segment where, traditionally, the bank says it has not had such a strong foothold.

The bank’s focus in developing its market-leading cross-asset coverage – especially within the credit and FX asset classes – has been key to this success.

Its unique special purpose vehicle (SPV) platform has been one pull factor for the regionals. Another achievement has been the onboarding of new clients to its revolving FX Facility, something that has been aided by other investment banks pulling back or exiting the business entirely.

The SPV platform is the cornerstone of Credit Suisse’s structured non-flow business in Japan. Through it, the bank offers its institutional clients an enormous range of payoffs – from vanilla and convertible bond repacks to exotic FX, rates and equity payoffs, all of which are packaged up and offered as secured exposures in either note or loan formats.

“This is something that we have been very focused on expanding over the past few years,” says Tomoyuki Sasai, head of solutions for Japan. “This year we have really made a mark [with SPV solutions] in terms of both market share and its appeal to clients.”

It is the SPV arbitrage payoffs developed this year that really showcase how the platform can capture and deliver otherwise inaccessible sources of yield for Japanese institutional clients.

The basic strategy is to help institutional investors trade opportunistically, and through a secured format, when market dislocations arise.

Last year, the SPV platform was used to deliver a leveraged return linked to the basis between Japan’s two yen swaps clearing houses – LCH and the Japan Securities Clearing Corporation – a phenomenon driven by an imbalance of trading positions at each.

This year we have really made a mark [with SPV solutions] in terms of both market share and its appeal to clients

Tomoyuki Sasai, Credit Suisse

As the opportunity to arbitrage the clearing house basis disappeared, Credit Suisse developed a new arbitrage innovation for SPV investors – credit default swap (CDS) index skew notes.

The notes offer investors leveraged exposures that exploit mispricing between CDS indexes – such as the CDX and iTraxx index families – and their single-name components, to return a juicy coupon.

Credit skew notes are not entirely new products. Investment banks have, in fact, been offering such notes to investors in Europe and Asia for a number of years.

The notes have, however, been a huge hit with yield-starved Japanese institutions recently. Over the past year, the bank has done several billion USD leveraged equivalent of skew package trades this year on the iTraxx Japan and the North American CDS (both investment-grade and high-yield).

“We have expanded into CDS Index skew in a big way,” says Sasai. “Our aim was to try to capture opportunities for clients and distinguish ourselves from our peers.”

Several aspects distinguish Credit Suisse’s CDS skew notes from those offered by other banks. First, the notes are issued off the SPV platform rather than through its own medium term note programmes – as is often the case with equivalent notes offered by other banks.

This, Sasai explains, means investors are taking the bank’s credit risk on the trades. “On the contrary, Credit Suisse, using our SPV platform, can tailor trades to match the client’s credit appetite, and reduce their exposure to bank credit risk with high-quality collateral in the process,” he says. 

We have expanded into CDS Index skew in a big way

Tomoyuki Sasai, Credit Suisse

A second advantage clients have with Credit Suisse is the bank’s ability to nimbly enter and exit these exposures, while keeping the client’s risk within the desired parameters.

As skew positions normalise, exposures can be unwound, offering clients the potential for additional returns while reducing risk. Once a skew position is closed out, clients can then enter into new skew trades to seek out further gains.

For example, one trade provided for a client was an iTraxx Japan Series 32 skew package, which, after two weeks was rolled to Series 33, bumping up the coupon by 40 basis points, says Barber.

Then, as the skew between the index and the single names once again changed, the bank de-risked the trade, leaving the investor with exposure only to Credit Suisse, the underlying collateral and the coupon. A further two weeks on, and Credit Suisse once again added iTraxx Japan Series 33 – generating a yield pick-up of roughly 30 basis points for the client.

The Japanese regional banks that have piled into these products over the past year did require some educating to get them comfortable.

Given their highly leveraged nature, these types of products can be prone to some mark-to-market volatility, something which was initially a worry for some clients. Credit Suisse addressed this concern by providing historical performance data, to show the banks what they can expect.

“For regional banks, it is normally out of their reach and takes detailed explanation process,” says Sasai. “It took some time to explain to clients about the product.”

The SPV platform also has another important application – namely to facilitate client access to Credit Suisse’s range of cleverly tailored QIS strategies.

One particular focus for the bank this year was introducing enhancements to its Vault SPV platform, such as a daily increase/decrease feature for as low as 1 million JPY ($10,000) nominal, allowing the platform to be used by retail funds. Through the platform all operational considerations – such as margining – are managed by Credit Suisse on behalf of the funds.

“We’ve added features that can be used as an underlying for retail funds, which is healthy for clients, because doing it through the SPV allows us to do the dirty work for them – their operational burden – and to deliver quickly on those products,” says Romain Barba, head of investment solutions structuring in Japan.

In total, Credit Suisse successfully executed 110 SPV trades in Japan between June 2019 and June 2020, not including restructurings. Even during the difficult Covid-19 lockdown period of March and April, the bank kept up the pace, doing a total of 30 SPV trades, including restructurings.

“This business has seen a significant increase over the previous year,” says Barba. “We have delivered for clients and we’ve had positive feedback from them. We’ve demonstrated our ability to execute efficiently in volatile markets and delivered value to clients, which they’ve seen as spreads have tightened and markets have normalised.”

FX on tap

The other solution that has helped Credit Suisse to build out its relationships in the Japanese regional bank sector is its FX Facility – a solution that would prove its worth during the Covid-19 pandemic- driven volatility in March and early April.

“In recent years, we’ve been really able to expand our relationships in the region with this transaction,” says Ryosuke Ishizawa, head of investment solutions sales, Japan.

Once again, the success Credit Suisse has had with this solution has been a product of collaboration across its structured flow and non-flow businesses, says Barba.

Japanese financial institutions have been coming under increasing regulatory scrutiny in recent years with respect to how they manage their foreign exchange positions. In particular, regulators want banks and other institutions to demonstrate that they are able to access foreign exchange, even in the most difficult, illiquid of financial market environments.

“FX risk has in fact become a focus of bank inspections in Japan, and banks need to show they can source foreign currencies during extreme events where markets become illiquid,” says Barba.

That has led to the rise of FX facilities, whereby a bank guarantees, in exchange for a facility fee, a client access to major currencies such as dollar, euro or Swiss franc over a certain period – for example, five years – through cross-currency basis swaps and rolling FX forwards.

Banks need to show they can source foreign currencies during extreme events where markets become illiquid

Romain Barba, Credit Suisse

“This is business is regulatory driven,” says Tim Millea, structurer at Credit Suisse in Tokyo. “Japanese regulators have wanted to ensure domestic banks have access to FX in all market environments, given their increasing investments overseas. Clients want to be able to demonstrate that they can hedge these risks.” he says.

Sasai adds that this has been a market for several years, but has become more of a focus for regional banks in recent years as their overseas investment portfolios have expanded.

In 2019, Credit Suisse started rolling out its own FX facilities tailored to each client’s specific needs in terms of currencies and formats.

At a time when, according to Barba, some other banks were exiting this business, Credit Suisse’s now-expanding regional sales force has been able to use the new offering to strengthen existing relationships with regional bank clients, and to build new ones.

It remains up to the client whether to actively use such facilities. They might, in fact, never draw upon the facility. But if they ever do need to, they can choose to do so up to the maximum amount on a short-term – typically spot – notice, which can be unwound at will.

In the event that a client does draw on the facility, the pricing will be set from a third-party broker screen, with Credit Suisse guaranteeing a price no worse than the bid on the screen.

Barba says the success the bank has had with this solution can be put down to a number of factors. This includes the space in the market left by the departure of other banks, the growing number of institutions seeking this product, a desire by banks with existing facilities to diversify counterparties, and the determined way in which Credit Suisse itself went about pursuing the business.

“Through our concerted efforts to grow the non-flow business, we worked hard with our clients to meet their needs,” he says. “Quite a few [of the regional banks] have very disparate requirements in terms of currency and structure – so we really try to cater to those needs in order to distinguish ourselves from our peers.”