The success of BNP Paribas' equity derivatives business in Japan means the French bank has become a force to be reckoned with in the country over the past year. And while other banks operating in Tokyo may have strong all round risk management and derivative offerings, it's principally the development of BNP's equity derivatives business that has led to it receiving Asia Risk's House of the Year, Japan award.
Key to the success of the bank's Japanese presence is the way its local operations form part of BNP's overall regional operations. "We know that we can't look at Asia as just one whole region. We must ensure we deal with countries individually, because some are much quicker than others to adapt to new technologies and products," explains Mike Watanabe, Tokyo-based co-head of BNP's equity products and fund derivatives development group, Japan and head of fund derivatives, Asia. "Also each country has very different regulatory frameworks."
"But by having one integrated product specialist group for fund derivatives for Asia including Japan and having country-specific marketers, we can treat this whole region from a product cycle perspective. You go into the market which is most receptive to new ideas first and continue to refine the product. By the time we go into Japan, our product is pretty much refined to the finest level and can deal with recurring large transactions," says Watanabe.
Japanese clients have been open to a number of innovative risk management tools and derivative products over the last 12 months, according to Watanabe. For example, in the first half of 2005, BNP Paribas developed a capital-protected, yen-denominated product designed to offer customers of local securities house SMBC Friend Securities exposure to a number of global hedge funds.
BNP worked very closely with the FTSE Group, particularly MSS, and the distributor to provide an option on a dynamic basket (ODB) structure offering a variable allocation to the FTSE Hedge Index. "Within the basket, an initial allocation to the underlying index was set at 100%," says Watanabe. "It would then vary according to the performance of the index between 20% and 200% through leverage provided by BNP at a notional financing cost." The product was distributed to retail investors as units of "a series trust of a Cayman umbrella unit trust".
Watanabe says the product was notable as the first yen-denominated, capital-protected Cayman unit trust linked to a hedge fund index using an ODB structure and offered to the public in Japan. He adds that the product further stands out because most "ODB structures sold in the Japanese market are denominated in foreign currencies".
Earlier this year BNP also developed a so-called hybrid rainbow structured product designed to be distributed by another security house in Japan, which "had identified a demand for products linked to oil-related assets". The product gave end-users exposure to commodities along with other asset classes such as government bonds and equities. "This product was very much in line with the views of moderately bullish investors willing to make a safe bet with an eye on alternative asset classes," says Watanabe.
"The product appealed initially to our client because of its hybrid component. The 1998 Asian crisis left a bitter taste with many Asian investors including in Japan who, while remaining optimistic on domestic equity markets in general, are often longing for mitigation of their pure equity exposure."