Switzerland's structured product suppliers lost millions during the coronavirus crisis, finews.com has learned. Except for a few exceptions, the providers kept their losses under wraps.

The Swiss structured products industry talks about trading turmoil during March and April when the coronavirus began spreading rapidly in Europe and the U.S. in glowing tones: «High financial market volatility enlivened the structured product business, spurring record volume of 4.45 billion Swiss francs» or $4.74 billion, the Swiss stock exchange said in its market report for March (in German). 

Issuers of products for leverage, capital protection, participation, or return optimization, it would seem, flew off the shelves as financial markets swung. The biggest domestic providers of the derivative instruments, measured by volume in March, were UBS, Vontobel, Zuercher Kantonalbank, Julius Baer, Raiffeisen, Credit Suisse, and Leonteq.

Triple-Digit Million Loss

The opposite is true, according to experts in structured products, an industry which is a major provider to the crop of private banks in Switzerland: most providers suffered hefty losses, with the largest suppliers hit with the biggest ones. UBS incurred a loss of roughly 100 million francs during the period, one person said.

The Swiss wealth manager didn't comment to finews.com. The Swiss Structured Products Association, or SSPA, did: «Of course the structured products industry was affected by the market turmoil caused by Covid-19.» However, the industry as a whole had weathered unprecedented volatility as well as volume fairly well, and liquidity was secured. «The industry passed this test of its toughness».

Leonteq's Admission

Just one provider actually admitted to losses: derivatives boutique Leonteq told shareholders in April it would just about break even in the first half due to the market ructions. The Zurich-based company blamed hedging losses on oil products and canceled dividends on stocks it owns for hedging. It also had to pony up more to hedge as liquidity became tighter.

Other European providers fared no better: French banks BNP Paribas and Société Générale reported global losses on the order of 200 million euros ($225 million) each on equity derivatives. Both French firms are part of the SSPA, but rank at tenth and 14th place in the Swiss lobby's ranking by revenue.

Triple «Whammy» Hit

The industry was squeezed by a triple whammy of loss-making events. Stock market correlation as well as volatility surged, while instruments built on company dividends saw those payouts frequently reneged in the turmoil.

«You can hedge against volatility to a certain extent, but only inadequately against dividend cancelations – and you can't hedge against correlation,» one industry expert told finews.com. Because banks are subject to so-called mark-to-market rules, they cannot simply sit out the losses – they had to reduce their positions. 

Remarkable Recovery Fortunes

Ironically, the structured product industry has had almost unbelievable good fortune since then: concerted efforts by governments and central banks sparked a global market recovery. Switzerland's blue-chip SMI index climbed nearly 23 percent since March; it is now just four percent off 2020 – a remarkable comeback which derivatives issuers will have made use of.

According to industry experts, structured product providers have probably nearly offset their losses since then – and are likely to fully do so by quarter-end. This means that one of the biggest losing streaks the Swiss derivative industry has ever seen will remain under wraps. Or as Bank Vontobel told finews.com: «Markets were demanding, but we navigated this period well.»