Corporate equity derivatives – the $3.5bn opague business on Wall Street

The implosion of a company with ties to South Africa’s wine country has caused a hangover for one of Wall Street’s most opaque businesses.

When shares in Steinhoff International Holdings NV cratered in December 2017, global investment banks lost more than $1 billion tied to so-called corporate equity derivatives. That’s equivalent to almost one-third of the revenue generated last year from such deals, which allow large clients to use shares to fund investments.

The scale of the losses has shaken up a business that’s grown as stock markets surged and been a key source of funds for banks’ most prized customers: billionaires, sovereign wealth funds and acquisitive Chinese conglomerates.

The Steinhoff trade that soured was a margin loan, a popular corporate equity derivative that allows a client to borrow from banks using shares as collateral. Other types that have been used frequently are so-called collar trades, which allow investors to amass stakes while protecting themselves against a decline in stock prices.

Soaring stock markets prompted clients to do more trades and is now bigger than trading oil and gold. The 12 biggest banks generated about $3.5 billion in revenue from arranging the contracts in 2017, a 28 percent increase compared with five years ago.

Read the full article on Bloomberg here