News & Analysis

Archegos wounds being licked by Credit Suisse

Andrew Saks, Thursday, 22 April 2021

The last thing Swiss Tier 1 FX interbank dealer Credit Suisse needs right now is another net loss.

This adversity echoes the bank's lack of fortunes five years ago when it prepared to cut 4,000 jobs as a result of a fourth quarter 2016 loss of 6.4 billion Swiss Francs.

Back then, Credit Suisse was a force to be reckoned with and was extremely dominant in the FX markets, its standing at the time being that of the largest foreign broker by market share across seven regions in the Asia Pacific region.

Even then, however, Credit Suisse had dropped to 12th position worldwide in terms of global FX market share by trading volume, and has since been absolutely trounced by the influx of urbane and sophisticated non-bank market makers that now dominate the global FX dealing market share charts at Tier 1 level.

The bank had played its part in settling regulatory fines for various transgressions just after that, and here we are today in a situation where Credit Suisse has needed to claw back its position as a profitable and strong contender in the global FX markets.

However, the eagerness to do so led to rash decision making, this time in the form of the ill-fated Archegos hedge fund which I noted last week will be remembered as a yardstick for changing the way the entire FX industry operates in future, and focusing the minds of retail FX and CFD traders on risk management.

Ergo, if the banks eschew risk management due to seeing potentially large dollar signs by onboarding a risky hedge fund which then costs everyone else their shirt, it is down to the retail brokers to demonstrate their in-house risk management skills to their clients.

Hello the well operated and benevolent b-book.

Whilst the bank got itself back into profit last year, the risks mounted and now Credit Suisse has a pre-tax loss of a rather hefty £593 million.

What a contrast to last year's 1.2 billion Swiss Francs worth of profit last year.

The figures were dragged down by a 4.4bn franc charge related to its exposure to Archegos, which collapsed last month after defaulting on margin calls.

Last week, I said that this is an appropriate time to use the Archegos hedge fund incident as an example of how inept risk management from Tier 1 institutions can lead to problems of which certain areas of the FX industry which are completely unassociated with the banks that created the problem could have to bear the brunt.

By that, I mean traders, and also FX liquidity takers, who rely on Tier 1 banks for order execution. No wonder the non-bank market makers are the new darlings of the OTC industry. They are efficient, they don't cherry pick and use last look execution tactics and they fill orders quickly without expecting huge escrowed accounts from brokers when they allow large hedge funds to default.

The Archegos debacle has scuppered Credit Suisse's projection which showed that it was on course for a 4.4 billion franc profit this year, its best results in 10 years, however now the firm has to suddenly deal with a loss.

Will this affect the value of the Swiss Franc against other majors? It is enough of a dent to make a difference to the Swiss economy.

It will also likely make Tier 1 FX dealers become even more risk averse toward OTC counterparties than they already are.

Thus, there are three takeaways. 1) The value of the Swiss Franc and potential volatility between it and its major peers the EUR, GBP and USD. 2) The share price of major FX dealers, including Credit Suisse, which is likely to suddenly show a volatile movement after a year of stability and then going from almost reporting a 10 year record in profits to a nasty loss, and 3) Risk management prudency, leading to the need for traders to ensure they work only with good quality brokers that give correct pricing, and not those white labels that will use this as an opportunity to create their own market pricing.

They say all good opportunities come in threes....

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