When Chicago-based Halo Investing, a technology-focused investment services start-up, saw that US registered investment advisers (RIAs) and their retail clients were being frustrated in their demand for structured products, it wanted to change that. But the company needed partners. This struck a chord with BNP Paribas and Halo identified the bank’s Smart Derivatives platform as having the services and technology that could help it achieve its goal.
“Our Smart Derivatives platform has always been about a vision rather than just a tool, so when Halo came to us with their story, we loved it and were happy to help,” says Franck Bertoneche, managing director and head of cross-asset distribution sales for the Americas at BNP Paribas. The bank is collaborating with Halo to provide pricing for RIAs on its platform, giving it the leg up into the market it was looking for.
“As a rapidly growing fintech company, Halo requires only the best technology from our partners,” says Jason Barsema, co-founder of Halo. “Smart Derivatives delivers attractive, efficient and effective pricing directly to our customers in a way that was inconceivable not long ago. BNP Paribas has allowed us to scale quickly and provide true value to our user base.”
The partnership with Halo follows BNP Paribas’ collaboration with US-based alternative investments platform provider Cais in 2015 and is part of the bank’s new focus on connectivity, both within its traditional industry boundaries and beyond. As part of this widening process, in 2016 the bank opened its platform to external issuers for the first time, with TD Bank and CIBC among those coming on board to offer their paper. This delivers a greater choice of products to its traditional clients, but the bank also has its eye on a further horizon.
“Smart Derivatives is a business-to-business platform because we are servicing other professionals. We need to find ways to get [to consumers] – that is why we are partnering with firms like Halo and others because they will provide the business-to-consumer part, which is key to an explosion of demand for structured products,” says Bertoneche.
We are partnering with firms like Halo and others because they will provide the business-to-consumer part, which is key to an explosion of demand for structured productsFranck Bertoneche, BNP Paribas
While reaching out for this new world, BNP Paribas has also been extending its platform in other ways to keep ahead of the growing competition in its traditional market and to penetrate new industry sectors. Over the past year, it has added new products, tools, services and trading strategies, a number of which are tailored for the Americas markets.
BNP Paribas has introduced credit-linked notes and rates products to equity derivatives that form the foundation of the platform, and is planning to introduce a range of foreign exchange products by the end of the year.
Thomas Guilhot, head of e-business and secondary market trading for equity derivatives in the Americas at BNP Paribas, says: “Smart Derivatives has become a cross-asset platform, and new asset classes and pay-offs will be added continually throughout 2017.”
He notes that the cross-asset abilities are particularly important in markets like Brazil – one of the eight jurisdictions in the Americas in which Smart Derivatives is now deployed – where a significant portion of client portfolios tend to be allocated to fixed income.
The bank has also added what it calls “light exotic” products aimed at hedge funds to the platform. These are hybrid structures with a forex component – for example, an option on the S&P 500 that is triggered if the euro breaches a certain level. For asset managers, the bank has introduced support for buy/write programmes – also known as covered calls – whereby a firm buys stocks and writes call options against them. Five large US asset managers are already using the service.
“We have also had interest from asset managers wanting to use the click-and-trade facility on the platform, another first for us in the US,” says Guilhot.
By adding support for quantitative investment strategies and third-party indexes, such as those from Morningstar, BNP Paribas has been able to target the insurance industry. For example, fixed indexed annuity providers can access automated pricing tools on custom indexes, and the bank is working on extending the support to include trading on the platform. This has enabled it to win some large mandates with major US insurers, he says.
With the regulatory regime increasingly stringent and reporting requirements ever more onerous, both for its own business and for its clients, BNP Paribas has been building components for the platform to aid compliance, including the requirements of some specific regulations. For example, clients can connect to a component built originally for the bank’s internal business that monitors products being priced to see whether they fall under the Section 871(m) of the US Internal Revenue Code covering withholding of tax on equity derivatives payments, said to be equivalent of dividends.
“Clients can connect to this component and get an alert if the product they are pricing is eligible for 871(m) and some explanation [of why the product falls under the rule],” says Guilhot. The platform also provides a full audit trail of clients’ activities that helps them meet the transparency requirements of this and other regulations, “which is one of the added values of using a platform such as Smart Derivatives,” he says.
“Smart Derivatives is the most complete tool in the structured products market by far,” says a Latin American business specialist at an alternative investment management firm. “It is the tool with the most pay-offs, capabilities and possibilities.”