Capital market products
The capital market products area of business covers a broad spectrum of products and services that are mainly aimed at other banks, public-sector entities, institutional investors, hedge funds and other financial service providers. These include brokerage and other trading services. In addition to providing advice, banks sometimes also act as counterparties via their balance sheet, for example in hedging transactions. This involves taking on risks, for which customers compensate them. Banks provide both bespoke services (e.g. in the context of mergers and acquisitions) and standardised capital market products for use by other bank units (e.g. structured products).
Swiss stock exchange turns over around CHF 100 bn per month
With an overall market capitalisation of around USD 2,000 bn, the Swiss Stock Exchange is among the top 20 exchanges worldwide.11 However, its market capitalisation is much smaller than those on the largest US exchanges, and Switzerland also lags behind the leading Asian and European bourses. On a long-term average, securities worth around CHF 100 bn are traded on the Swiss Stock Exchange every month. Domestic equities make up the vast majority of this total. Bonds, investment products, structured products and options are also traded on the Swiss Stock Exchange, albeit in smaller volumes. Trading activity is heavily dependent on current developments. For example, monthly stock market turnover was much higher than usual during the “Swiss franc shock” in January 2015, when the COVID-19 pandemic broke out in 2020, and when Russia invaded Ukraine in February 2022. Banks offer their customers access to the capital market and execute stock exchange orders on their behalf. They also offer specialised services such as brokerage (financing, custody and clearing for securities transactions), financing for exchange trades and algorithm-based trading strategies.
Derivatives: the basis for hedging
Derivatives are financial instruments that are based on a contract between two or more parties and depend on the price of an underlying asset. They can take the form of forwards or futures, in which the terms of a transaction in the future are fixed, or options, in which the future transaction might happen but does not have to. They can be used, for example, to hedge future fluctuations in the price of the underlying asset. The party wishing to hedge this risk pays a premium to the party that takes it on. The size of the premium depends on the expected trend in the price of the underlying asset. Banks often act as a counterparty for their customers in this type of transaction. However, derivatives may be traded on an exchange, in which case the contractual rights and obligations they entail pass to a third party. The parties involved thus benefit from the market’s pricing mechanisms and liquidity. Examples of how derivatives are used include hedging future interest rate trends for providers of fixed-rate mortgages and managing exchange rate risks for export-oriented companies. While the public at large is perhaps unfamiliar with derivatives, they are nevertheless a key element of banking products that are in widespread use. At the end of 2021, derivatives with a cumulative contract volume of CHF 25,613 bn were placed with banks in Switzerland. The largest proportion of these contracts have interest rate instruments as their underlying, with currencies making up the next-largest proportion. The contract volume of derivatives has decreased sharply since the beginning of the financial crisis and stabilised at a much lower level.
Structured products can accommodate all kinds of market expectations
Structured products are usually a combination of a conventional investment (such as a share or bond) and a derivative. They are used when investors wish to bundle their market expectations together and replicate them with a single product. For example, a structured product can serve to protect the invested capital, produce a leverage effect on movements in the price of an underlying security or optimise returns. They can be used to make more complex trading strategies accessible even to smaller investors. The Swiss Structured Products Association (SSPA) divides structured products into five categories, each of which is split further into sub-categories, in its Swiss Derivative Map.12 According to the SSPA, more than 60,000 structured products are available in Switzerland. Structured products are traded on an exchange or “over the counter”, i.e. off-exchange. Over-the-counter transactions are agreed and settled individually between two market participants. According to the SSPA’s Value Creation Report, which covers both listed and unlisted products that are created in Switzerland and sold worldwide, the structured products industry generated revenues of CHF 221 bn in 2022.13