Go with the flow
Investors looking to reshuffle credit exposures in the wake of the pandemic spurred record trading volumes in the first half of 2020, presenting a golden opportunity for bank trading desks. For remaining a consistent and trusted trading partner for clients during this turbulent period, Credit Suisse is IFR’s Credit Derivatives House of the Year.
When a crisis looms over markets, credit is often the main pressure point. A sharp rise in corporate borrowing costs can quickly translate into company defaults and losses for debt investors – not to mention banks that have parcelled together complex products during more tranquil times.
So it stands in stark contrast to the financial crisis of 2008 that not only did banks avoid sustaining life-threatening credit-trading losses when the coronavirus pandemic upended markets last year, but some actually flourished amid record trading volumes.
Credit Suisse stood out among the top investment banks specialising in credit derivatives during this challenging period. It traded colossal volumes of single-name and index credit-default swaps in Europe and the US at the height of the turbulence, earning more revenue than any other bank trading these products globally in the first half of the year, according to analytics firm Coalition Greenwich.
That success came on the back of Credit Suisse roughly tripling its global credit derivatives trading revenues over that period, building on an 80% increase in 2019 from the previous year.
“It’s been a year where our dominant market share in CDS has really contributed tremendously to our revenue base. It meant we were in a good position with our clients to be able to facilitate their flow, especially when the going got tough in March and April,” said Basil Eggenschwyler, head of EMEA investment-grade and leveraged finance trading and sector strategy.
Credit Suisse’s success in US credit derivatives is particularly impressive given this is a market where it is competing mainly with US banks with large balance sheets to deploy. Credit Suisse has focused on cleared, capital-efficient CDS products with the aim of trading as much volume as possible, while holding very little risk from one trading day to the next.
That emphasis on trading as much as possible paid off in the first half – the busiest period on record for US CDS index volumes with US$3.6trn changing hands across the market, according to ISDA. Credit Suisse dominated those flows, recording the largest market share in client business in Americas index CDS among the top investment banks in the first half, according to Coalition Greenwich.
David Goldenberg, head of US credit derivatives, said that “alarm bells” ringing in the CDS index market in February as the pandemic intensified had prompted his team to prepare for the ensuing sell-off.
“We had very clean books heading into this and as such we were able to provide liquidity continuously,” he said.
Clients attest to that commitment. “What sets Credit Suisse apart from others is their approach to their business,” said a senior trader at a large asset manager, noting the bank’s emphasis on transacting large volumes of CDS.
“If you’re stand-up, trustworthy you just get larger [business],” he added. “I’d call [them] the top CDX pod out there on the Street. They just have magnificent outlets of risk.”
Spending time to understand exactly what clients need has been a crucial part of the strategy. Credit Suisse performed three portfolio optimisation analyses for clients last year, examining their exposures by different metrics such as ratings, sector and duration, and proposing various changes. That resulted in portfolio trades of a few hundred million euros in size.
“We’ve invested in creating a culture that is truly client-centric, understanding the client like a company,” said Diego Discepoli, head of EMEA global credit products sales.
That success is also evident in Credit Suisse’s home market in Europe, where the bank’s prowess in high-yield and distressed CDS in particular remains unrivalled. Coalition Greenwich data show Credit Suisse secured the greatest market share in client business in EMEA high-yield single-name CDS in the first six months of 2020.
The bank has also invested significantly in the investment-grade CDS business in Europe, hiring five traders and two salespeople in recent years. Credit Suisse calculates it has tripled its market share of investment-grade, single-name CDS volumes since the start of 2019.
There has been “a consistent dedication to the product over the past decade that ... really comes into its own during a crisis”, said Eggenschwyler.
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