Credit Suisse Group AG is planning a sweeping overhaul of the hedge fund business at the centre of the Archegos Capital blow up, as the drama forces Wall Street banks to reconsider how they finance some of their most lucrative clients.
The Swiss bank is weighing significant cuts to its prime brokerage arm in coming months, people familiar with the plan said.
The lender has already moved to tighten financing terms with some funds, and hopes changes to the unit can allow it to forgo major cuts to other parts of the investment bank, which just had a banner quarter, the people said, asking not to be identified as the matter is private.
The implosion of Bill Hwang’s family office — which has caused one of the costliest blows to Credit Suisse in its 165-year history — is the latest reckoning for banks chasing the lucrative business of catering to hedge funds, which present the potential for both outsized gains and huge losses, magnified by large borrowing.
Deutsche Bank AG sold its prime brokerage business to BNP Paribas SA in 2019 as part of a retreat from equities during the German bank’s overhaul.
Credit Suisse declined to comment.
Prime-brokerage divisions cater specifically to hedge funds, lending them cash and securities and executing their trades, and the relationships can be vital for investment banks as well as being a significant source of revenue.
Credit Suisse is the biggest prime broker among European banks, in an industry that accounted for about $15bn of revenue in 2020.
Prime brokerage generally accounts for about a third of equities revenue across the industry most years.
Since the drama, Credit Suisse has been calling clients to change margin requirements in swap agreements so they match the more restrictive terms of other prime-brokerage contracts, people with direct knowledge of the matter said.
Specifically, the bank is shifting from static margining to dynamic margining, which may force clients to post more collateral and could reduce the profitability of some trades.
Swaps are the derivatives Hwang used to make highly leveraged bets on stocks at Archegos and which lie at the heart of the losses.
Credit Suisse is also concerned the woes at the prime brokerage business will impact morale at other parts of the securities business and that it may spark departures, the people said.
The investment bank is keen to take care of top performers, the people said. Deutsche Bank sold its prime business to BNP as part of the German bank’s huge 2019 overhaul that intended to cut its investment banking business, especially in equities.
The lender, which became a force on Wall Street after the financial crisis, had struggled to keep hedge funds clients in recent years after a string of missteps, and client balances declined in the run up to chief executive officer Christian Sewing’s decision to sell the business.
Now, at Credit Suisse, CEO Thomas Gottstein — who signalled the bank planned to reduce risk in prime brokerage in a Swiss newspaper article — is facing questions from his own star traders, dealmakers and private bankers on why the bank’s $4.7bn hit from Archegos was so much bigger than any of its rivals.
The bank announced a raft of changes within the investment bank because of the loss, including the departure of Brian Chin, who led the business.
The head of equities sales and trading Paul Galietto, is stepping down immediately, though will stay through April to assist in the transition, according to a staff memo earlier this week reviewed by Bloomberg.
The lender also announced three additional exits. Ryan Atkinson, head of credit risk for the investment bank; Ilana Ash, head of counterparty credit risk management for that unit and Manish Mehta, head of counterparty hedge fund risk, according to the memo. The bank has seen a run of missteps under the final months of Urs Rohner’s tenure as chairman.
Antonio Horta-Osario is set to take over after the bank’s annual general meeting later this month.
Known for disciplined cost-cutting during his time at Lloyds Banking Group Plc, he may also make further changes.
Gottstein, who pledged a “clean slate” after scandals under his predecessor, is wedged between disgruntled staff and his own bosses who are increasingly taking charge.
The board is pushing for a review of the bank’s wider strategy, not just the units that have run into trouble, the people said.
A Credit Suisse logo on the roof of its headquarters in Zurich. Credit Suisse is planning a sweeping overhaul of the hedge fund business at the centre of the Archegos Capital blow up, as the drama forces Wall Street banks to reconsider how they finance some of their most lucrative clients.
