Some banks are innovative deal-makers, others are volume players. In the world of risk management we reward JP Morgan for having something in addition: a mission and an ability to explain the product as well as use it. This may not create the greatest revenues today, although $1 billion from derivatives in two quarters last year is not bad – but more important it lays the basis for repeat business in coming years and decades, not only for JP Morgan but for others that follow.
This is not altruism, we’re sure it’s enlightened self-interest, but it fits with an era in which silo-like competition between firms is losing its advantage, while transparent dealing through open portals to multiple dealers seems to be the way forward. It is the competition of openness and transparency, and no firm has embraced this more in the risk management area than JP Morgan.
In the last year alone it has launched nearly a dozen toolboxes on the internet to give derivatives and risk management users a sharper view of instruments, volatilities, indexes to trade and hedge with. JP Morgan has also been behind, or signed up to, most of the major web-based initiatives to improve derivatives trading and settlement.
Those analysts and risk experts who are familiar with JP Morgan, and aren’t competing with it, give the firm high marks for innovation and product structuring, be it credit default swaps, securitizations, portfolio rebalancing or commodity derivatives.
“We aim to be as complete as possible across the risk categories,” says Bill Winters, JP Morgan’s head of global markets. Yet “we are a low-cost producer on the derivatives side”, he adds. “In any war of attrition, we would win.”
JP Morgan stunned the competition when it launched RiskMetrics free on the internet in 1994. It hasn’t looked back. In 1997 it launched a sister product CreditMetrics.
Although today some of that methodology looks a bit dated, like the early Gemini spacecraft, the openness set an agenda for the market to follow.
Most recently JP Morgan launched muniderivatives.com a website providing access to information for municipal bond traders and investors about products and strategies, proprietary models and tools to help a user analyze market risk and develop customized derivatives-based solutions online.
Over the last year it also launched Arcordia, an internet-based derivatives management and settlement company using JP Morgan’s mid-office expertise (Arcordia, says Winters, “is the cheapest thing out there. It can handle everything JP Morgan trades”); Creditex, a trading platform for credit derivatives; Cygnifi, a derivatives services company offering market and credit risk applications and portfolio stress-testing; Morgancredit.com, offering two-way prices for credit derivatives online, with execution by telephone; Volcenter, offering spot, forward and volatility surfaces for foreign exchange and precious metals options; a European credit swap index (ECSI) of major European corporates; Horizon (with Ernst&Young), a tool for operational risk; and various updates to DataMetrics a database for risk managers.
Making this data freely available has helped to brand JP Morgan as the firm to call on risk management.
That branding is doubly important now that the top firms are opening joint portals – such as Swapswire and Market Axess – and standardizing many processes and products.
There are many other routes to success as a risk management firm. Chase, for example, must rate as the best high-volume deliverer of risk management products; Citibank as the specialist in loan portfolio management; all the global investment banking firms have specialist strengths in derivatives. It is a wide-open field. But JP Morgan is cited more often than others as leader and agenda-setter.
