Barclays Capital is by far the best service provider in the Americas, issues all the known kinds of registered notes, has even bigger plans for its educational initiative, has improved an impressive secondary trading and electronic offering, and is much appreciated by distributors. The bank has taken a tough 12 months of uncertain markets in its stride, even improving its market share as other product providers fall away or submerge themselves in consolidation.
The addition of the Lehman Brothers structured products team may not have been the making of the UK bank, but it has filled in the bits missing from what was already an impressive, multi-asset class portfolio. The creation of Barclays Wealth and the assumption of Lehman's leading rates business were completed seamlessly, while regular business was improved by the continued opening up in the US of private banking distribution channels. Barclays has also adopted Lehman's business in Latin America and cut its teeth in Canada, where it has established a retail structured products platform, off which its first issuance was in August 2008.
Barclays has changed since taking over Lehman, according to one distributor who had previously found the bank uncompetitive in pricing and speed of delivery. "As soon as they bought the Lehman Brothers guys, it completely changed, and right now they are number one," says the distributor. "While broker-dealers are laying off staff, Barclays has been able to take advantage. They are able to give me prices immediately that are on the mark."
Other distributors have long been impressed with Barclays, even before the inclusion of the Lehman staff. The distributor explains an important feature in the way that the bank has reacted to the credit crunch. "Private banking clients bought a lot of hedge fund investments. They also bought a lot of structured products. These clients have been hurt by the markets and have lost a lot of money. I can't go back to them and offer hedge funds. And if I offer structured products I have to be careful, and can only offer them principal-protected products."
More to the point, distributors need to offer smaller deals, and this is where Barclays scores highly. "Other providers are being stubborn and asking for deal sizes of US$1 million or $2 million. If I call Barclays, they can do $500,000 or $600,000, so I can close deals. Before I used to do $5 million or $10 million, but now I don't have that any more."
A strategy of helping its clients is widespread in the structured products business that Philippe El-Asmar, managing director and head of investor solutions, runs globally from New York. "The most important element of the structured business in the US is consistency. We always back the products created and provide liquidity around them. This approach has gained us a very good reputation in the Americas. We don't approach it as a one-off trade, but as a business relationship and a long-term business opportunity," he says.
Another distributor appreciated the bank's efforts and endorsed the long-term strategy: "We have had very good experience with the expertise as well as with the client service. The people on this desk are top-notch, and I look forward to doing more with them in the future."
Consolidation in the banking sector has had a particularly profound effect on the number of product providers in the US. JP Morgan has taken over Bear Stearns, Bank of America has picked up Merrill Lynch, Wachovia has moved in with Wells Fargo, while Barclays has adopted the staff employed at Lehman Brothers. The upshot for structured products is that a market that relied on around 10 providers for around 80% of the $114 billion of volume issued in 2007 and around $90 billion in 2008 will probably rely on half that number in 2009, says El-Asmar.
Richard Couzens, head of product origination, investor solutions, at Barclays Capital, notes the build-out that has followed the integration with enhanced trading and structuring. "The integration happened relatively quickly and efficiently," says Couzens. "It was a success and helped in our innovation. Lehman was particularly strong in rates; Barclays was more weighted in structured investments in the US on the non-rates business."
"Now we have a dedicated team covering Barclays Wealth in the US, which is a large part of our business," says Couzens. "We have seen a pick-up in our trading and structuring across each asset class as a result of the integration."
It also revived a conversation between the two banks about the issuance of an exchange-traded note (ETN) based on volatility. "In March 2008, we approached Lehman to help us issue the ETN and work with us on the hedging," says El-Asmar. "Lehman was one of the best - if not the best - in that space, and was particularly active in Vix futures and institutional size volatility because of its phenomenal cash equities franchise, while we were focused on cash derivatives."
Lehman decided to launch its own ETN business, but in September 2008, when the integration with Barclays began, "we found the people that we had been talking to and immediately started on launching the two Vix ETNs that we now list on the New York Stock Exchange (NYSE)," says El-Asmar. "Since February 2009, these have been launched on the NYSE and have been our most successful ETNs - they have attracted $60 million-70 million over the past six weeks. But what is more interesting is that they trade on a daily basis $80 million-100 million on the exchange, so they are the most actively traded ETNs that we have ever launched." The ETNs cater to institutional clients, such as hedge funds, day traders or asset managers trying to hedge their long equity positions.
"Before the integration, we couldn't provide that, so we had a distribution platform meeting a very strong trading team, and that's what brought the Vix ETNs to market," says El-Asmar.
The Lehman acquisition also brought with it more algorithmic strategy indexes to add to the Barclays platform, including the Lehman Agg, the biggest index platform in fixed income, and now called the Barclays Agg.
Index innovation came in the form of linking to inflation. "We brought out the long-short version of the inflation index in response to the demands of two dealers," says El-Asmar. "We have launched this in ETN, iPath, structured notes, certificates of deposits (CDs) and other forms."
One distributor offered further insight into the benefits on offer: "In addition to using the Pure Beta algorithm that Barclays inherited from Lehman, we did another commodities note directly with Barclays' structured notes desk, using the 1501 methodology, which reduces the effects of roll yield in commodities tracking notes. This note is still held in our client accounts. We had a very good experience with the commodities specialists and, of course, the representatives of the structured notes desk at Barclays when putting this note together.
"We have used Barclays for commodities and equity underlying, and have explored several other structured note ideas. Our contacts at Barclays always get us to the appropriate experts and provide many structuring options that may fit our objectives. We work with several firms and, overall, they are probably the best."
The adoption of open architecture by ever more private banking networks has put Barclays on the list of providers to UBS, JP Morgan and Credit Suisse private banks. Barclays became the second third-party provider to join the Morgan Stanley private bank network this February.
Barclays has a team, under Couzens, which provides for this distribution channel. Another team in the US looks after advisers, family offices and trust companies. "They want more customised, rather than more complex, products," says Couzens. The multi-family offices are more interested in access products than payouts, allowing a degree of exposure to, say, Asian equities, says El-Asmar.
For the larger family offices with their greater sophistication, Barclays offers products more specifically designed for commodities and oil. "We have also done inflation swaps, precious metal options for these family offices and some equity derivatives hedging trades, and some hedge fund derivatives transactions."
The team for broker-dealers typically does high volumes from a monthly deal calendar. "There are potentially 1,000 broker-dealers in the US, and we work with the top 150 to 200," says El-Asmar.
The US market has, over the past 12 months, been further characterised by the almost complete disappearance of unregistered, section 382 issuance vehicles. Unregistered issuance has shrunk to 2%, from a more typical 10% in most years, says El-Asmar. "There has been very little listing of structured products in the US, with the exception of ETNs," he says. "CD deals are becoming the key trend in the market."
The bulk of Barclays' business has been in registered notes, although it started its Federal Deposit Insurance Corporation (FDIC)-backed CD platform in July 2007. It has also recently created a warrants platform, and has a suite of private placement platforms. "It means we can adapt very quickly in the current environment," says Couzens.
The re-emergence of concerns over credit risk has led Barclays to maintain very good relations with third party issuers, says Couzens. "We have had the relationships for several years and can use, selectively, Exportfinans and SEK, in addition to corporates and others."
El-Asmar says most clients are still very comfortable with Barclays as an issuer or provider of products. While some ask for CD vehicles because of the FDIC insurance, others have too much concentration of Barclays products and "ask from time to time for us to arrange third-party issuers, like Exportfinans," he says. "In certain structures, people are more comfortable than in others. For example, in the ETN structures with their daily redemptions, credit concerns have had little if any influence."
The presence of a two-way secondary market in the US also fits the Barclays strategy, particularly with the development of its Barx Investor Solutions e-commerce platform. "All the structured investments we issue into the market have an active secondary market and offer intra-day liquidity," says Couzens.
Barclays does 71% of its secondary business online, with clients selling back and buying, and activity slightly skewed towards those selling back. The business was maintained throughout the tough last quarter of 2008. "Last year, we saw more inflows, that is, more people buying than selling. In the second part of the year, there was more selling to us," says El-Asmar.
Taking the initiative with technology that is defining the future of the business is typical of the bank's long-term commitment, even in troubled markets. "As Nicholas Reilly, a product specialist at Fifth Third Bank, says: "It is willing to do the things that don't translate to the bottom line immediately. It has just the right number of people on the desk, there is always someone available to help on any asset class, and its pricing is competitive - as good or better than its peer group."
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