BNP Paribas
The French bank has superceded its great domestic rival by offering several innovative products
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Also shortlisted in this category: |
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“Because of the resilience of our models, of our systems, our internal controls and our risk appetitie versus reward that we’ve come out of the crisis so strongly” |
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The fight to dominate in equity derivatives has often been characterized as a tussle between BNP Paribas and Société Générale, with the latter historically having the edge over its domestic rival to win the most accolades. Not any more. The Jérôme Kerviel affair has severely dented SG’s reputation as well as its bottom line, and no one is quite sure yet what damage it will do over the longer term.
That said, SG’s equity derivatives business is still there, its quantitative experts are still innovating and its sales teams still selling. It remains a formidable equity derivatives house – which is why it made our shortlist for this award. However, BNP Paribas’ equity derivatives business has gone from strength to strength, its reputation for innovation and business conduct undiminished through some of the most trying market conditions in decades.
Although BNP had to freeze some asset-backed securities funds early in the credit crisis, overall it has fared much better than most banks. “It’s been a tough year for all banks, but it’s because of the resilience of our models, of our systems, our internal controls and our risk appetite versus reward that we’ve come out of the crisis so strongly,” says Shaun Wainstein, the bank’s London-based head of equities and derivatives.
With a AA+ credit rating from Standard & Poor’s, BNP Paribas is one of the highest-rated banks in the world. That is important at a time when buyers in the equity-linked business are, for the first time, taking seriously the creditworthiness of their counterparts. “There is now a much better understanding of the importance of the quality of the issuer by the retail distribution networks,” says Jean-Eric Pacini, head of structured product sales in London.
“More and more people are coming to us saying that they can’t do a trade with a particular partner because their credit rating is too low or their financial strength is too low. We’ve certainly benefited from that,” adds Wainstein.
The bank’s equity derivatives group has continued to bring groundbreaking deals and products to market. It has worked to provide its clients with innovative investment solutions designed to take exposure to new and emerging asset classes. Its VolEdge product, for example, tracks the implied volatility of the Dow Jones Eurtostoxx 50 index and has quickly established itself as a reliable tool for gaining exposure to volatility or for hedging.
VolEdge is available in fund format via the bank’s Harewood Asset Management division, which was set up in 2004 as a specialist boutique to give clients access to sophisticated investment strategies. Harewood offers funds in four categories: equities, commodities, hidden assets and absolute return. VolEdge falls into the hidden assets category, along with several other cutting-edge strategies. The Harewood Global Synchro Equity fund, for instance, is designed to sell the covariance of the major industrialized markets (US, Europe and Japan) at its highest levels, while its Voltimum fund tracks the one-year implied volatility of the Eurostoxx. It also has a correlation fund that aims to sell European stock correlation at a level close to its highest historical value.
The bank has also created a number of innovative algorithm-based systematic trading strategies. Spectrum Long Short, for example, is a systematic market-neutral strategy that takes various asset management styles, such as value versus growth or US versus European equities, and applies long/short trading techniques to try to eke out value.
Another sign of the bank’s strength, self-confidence and ambition was its June acquisition of Bank of America’s equity prime brokerage business. The deal is subject to regulatory approval but is expected to be completed later this year. The business provides a number of services to hedge funds, including secured financing, securities settlement, custody, capital introduction, securities lending, and systems and technology solutions. The acquisition should bring a number of benefits to the BNP Paribas equity derivatives business overall. It enables the bank to offer its equity derivatives solutions to a much wider base and instantly opens up a new range of clients. But the deal is also important in terms of alternative risk transfer.
“An efficient and globally diversified derivatives business has to be able to reprocess risk from one side of the client base to the other,” says Nick Tranter, BNP Paribas’ London-based head of European equity derivatives flow sales. An increasingly important part of the equity derivatives business is finding ways to manage correlation and volatility, and one way to do that is to pass those risks on to hedge funds. “The Bank of America transaction gives us access to an entire client base – the long/short client base – where historically their prime broker has provided them with a very narrow set of derivative services. We can provide those services, and we have a distribution mechanism for reprocessing correlation and volatility,” says Tranter.
That in turn enables the bank to do even more equity derivatives business, putting it in an even stronger position relative to its peers.
