Deutsche Bank

Deutsche can claim to have done more than any other bank to save clients’ money in treacherous markets

Also shortlisted in this category: HSBC BNP Paribas
	“It wasn’t what trades you put clients into so much as what you talked them out of doing that was most valuable” Fred Brettschneider

The key risks facing issuers and investors are very basic: a lack of liquidity, scarcity of funding, difficulty of executing trades and hedges amid rising volatility and correlation in credit, equity and rates markets where asset values have been declining, sometimes precipitously.

Customers aren’t interested in devilishly complex structured derivatives packages derived to increase payoffs in a low-yield world. Buying that stuff is what got many of them into trouble in the first place. They want clear advice, the ability to transact and good execution.

Deutsche is perhaps the firm most renowned for the capacity of its derivatives rocket scientists to pioneer dizzyingly complex products off the back of its own huge book. But all that clever stuff is neither here nor there right now. Deutsche has also sat right in the middle of some of the worst affected markets, notably mortgages and credit. It has emerged with a strong claim to have done more than any other to save its clients’ money in treacherous markets.

The bank has remained a consistent provider of liquidity, as others reined in principal and customer trading. In the first quarter of 2008, perhaps the most testing period leading up to the near collapse and rescue sale of Bear Stearns in March, it executed €650 billion of credit derivatives in Europe alone and €3 trillion of rate derivatives. In the US, its credit index trading, equity options trading, single-stock and equity index variance swaps and rates volumes have all risen dramatically in the past year. It has simply been open for business while many others have shut down.

It has structured products with low correlation to traditional long equity and bond investments, based on alternative assets from emerging market real estate to commodities. But investors have been thankful for more prosaic services and in particular for good advice, as they struggled to balance loss-making sub-prime positions against higher-rated credits, only to find these too declining.

Fred Brettschneider, managing director and head of global markets – Americas, says: “Often it wasn’t what trades you put clients into so much as what you talked them out of doing that was most valuable. For example, as sub-prime contagion first spread, we advised clients to avoid related areas which could be affected.”

The firm had seen the sub-prime crisis coming and in 2006 and early 2007 was advising ABS and mortgage investors to go short. That advice fell largely on deaf ears and so the firm persuaded others in the credit markets that such a strategy might be a good hedge against contagion spreading from the sub-prime market.

In 2007, it helped emerging market hedge fund investors to hedge with the short mortgage trade. In the second half of the year, even as some investors hoped in vain that US government pronouncements of plans to boost the mortgage markets would end the panic, it preached the gospel to among others high-yield mutual funds and even equity investors. The firm calculates that in 2007 and 2008 it put more than 100 clients into $70 billion of short sub-prime trades generating $50 billion of offsetting benefits to put against declining asset values. Meanwhile, it has also bid competitively for large blocks of distressed mortgage assets, enabling those that ignored its advice to take a final way out.

The benefits of all this were felt by clients in other areas, like rates. New-issue volumes have been high, notably in the US investment-grade debt markets, but some issuers have faced constraints on hedging interest rate risk because of banks’ reduced counterparty credit appetite. Deutsche’s counterparty risk management technology inside rates, which requires it to buy protection through default swaps and options and delta hedge as credit spreads widen, gave it the capacity to step in and fill the gap.

In equity it’s a similar story. Lee Frankenfield, managing director, global complex equity trading, says: “There has been a move back to plain vanilla instruments away from some of the more innovative structured products and we have maintained a consistent commitment to provide liquidity.

So for example when certain counterparts wished to exit correlation trades, there was no backing away.” Of course, the firm can’t stop itself inventing new things and the daringly named albatross strategy, an equity volatility play by which clients can go short the volatility of the eight worst-performing indices and long the best, exploiting the skew in a trade that regularly rebalances, has been popular and successful.

BNP Paribas stood out in the shortlist for this award for its ground-breaking deal-contingent hedges for corporations and funding ratio collars for pension funds. HSBC, like Deutsche, has increased its market share simply by staying open for business and providing plain vanilla hedges which it is also introducing to large first-time users across many emerging markets.