Credit Suisse is shutting down most of its hedge fund prime brokerage services following significant losses incurred as a result of Archegos Capital Management’s collapse earlier this year.
Credit Suisse is shutting down most of its hedge fund prime brokerage services following significant losses incurred as a result of Archegos Capital Management’s collapse earlier this year.
The Switzerland-headquartered group’s investment banking division will exit most of its Prime Services operations from January 2022, cutting the investment bank division’s capital by some USD3 billion, or 25 per cent, with some CHF3 billion redeployed to its wealth management operations.
The move is part of a broader group-wide overhaul and re-focus, which will see Credit Suisse restructured into four divisions – Wealth Management, Investment Bank, Swiss Bank and Asset Management – across four geographic regions: Switzerland; Europe, Middle East and Africa (EMEA); Asia-Pacific (APAC) and Americas.
The Zurich-based group’s decision to withdraw from prime services – as part of an overall investment bank scale-back – is a major shake-up for the hedge fund prime brokerage sector, which continues to feel the impact from the Archegos debacle.
The dramatic collapse of Bill Hwang’s single family office back in late March this year – triggered after the firm defaulted on a series of margin calls by several investment banks – highlighted the risks of excessive leverage in the form of prime brokerage margin lending.
Archegos built a highly-concentrated portfolio of hugely-levered positions across a range of stocks. These were taken via the equity derivatives market mainly in the form of total return swaps.
At the point of its collapse, Hwang’s firm had assets in excess of typical, mid-sized hedge funds. The disorderly unwinding of some USD20 billion of liquid capital as a result of its wayward bets heralded losses for several major banks including Credit Suisse, which reportedly took an initial USD5 billion hit, as well as Nomura.
The episode raised fundamental questions over risk management, portfolio transparency, margin limits and greater regulatory scrutiny across the hedge fund and prime brokerage sphere.
In a statement on Thursday unveiling its group strategy, Credit Suisse pledged to place risk management, and the importance of accountability and responsibility, at its core.
“As part of the outcomes of the strategic review, the bank will continue to focus on risk culture, putting risk management at the heart of all its actions, with investments in data, infrastructure, reporting capabilities, as well as in compliance,” it said.
Credit Suisse said it will exit most prime services, with the exception of Index Access and APAC Delta One, over the course of 2021 and 2022, and instead invest in businesses “where there are clear competitive advantages as well as those that are capital-light advisory-driven and/or have connectivity to Wealth Management.”
Other changes include the addition of 500 new relationship managers, and a 60 per cent increase in technology investments by 2024.
