The European equity derivatives business is core to BNP Paribas. The bank’s prowess has supported impressive earnings numbers: its reported global earnings for equities income jumped 36% in the first quarter of 2017 and 26% in the second quarter, which helped cushion a 16% drop in Q2 fixed-income business.
As investors have turned their backs on fixed-income products and sought out yield in equity products, BNP Paribas’ distribution business has been ignited. “In 2016, the distribution business suffered, which was compensated by our institutional and corporate businesses,” explains Nicolas Marque, the bank’s global head of equity derivatives. “Now in 2017, thanks to diversification of our client base, we are taking market share as distribution business comes back.”
The company’s eminence in the distribution of equity derivatives products to a widening client base is in part a product of thinning supply. As Marque readily admits, erstwhile competitors are finding they lack the critical mass to stay the game as regulatory burdens become increasingly onerous. There is more to it, however. The bank is not content with the status quo, and constantly seeks out new distribution channels.
In July it was announced that BNP Paribas would acquire the risk relating to a €5.5 billion ($6.4 billion) portfolio of equity-linked structured notes which had been issued by ING. That entails a fiendishly complicated risk transfer involving around 900 client trades and over-the-counter swaps with 100 counterparties novated to the French bank.
The fact that BNP Paribas completed similar risk transfers with the acquisition of a €12.5 billion portfolio from Crédit Agricole in 2014 means it knows the terrain, which was a comfort to ING. But the bank’s willingness to take on such a complex task shows its ambition to reach new clients.
Indeed, the complexity of the deal was one of its attractions, says Marque. The transfer of risk helped improve BNP Paribas’ infrastructure and IT systems, for instance. “We’re not just doing this trade for price reasons,” he explains. “It helps us to maintain our expertise and our competitive edge. It’s also a visible trade, and by doing it you continue to be seen as an important player in this space.”
Flourishing equity markets have supported a general growth in interest in the structured products business this year, particularly as rates remain so narrow. The Euro Stoxx 50, a key underlying for structured notes in Europe, had gained 9.5% on the year by late October.
But it takes prowess in innovation and execution to exploit these conditions. BNP Paribas’ skill in the creation of indexes drew commendation from the awards judges, with one saying that it seemingly had the ability to anticipate market trends and design indexes accordingly.
We have been impressed by BNP Paribas’ dedication to drive better customer outcomesAndrej Ogorevc, Old Mutual Wealth
The Target Income Enhanced Returns (Tier) Indices that were launched in late 2016 exemplify the bank’s strength in creative, cutting-edge benchmarks. These indexes act, in essence, like a reverse convertible in which at-the-money puts are sold on a daily basis for only a month rather than once for, say, three years.
By doing trades every day, timing risk is removed, which is a chief selling point in a market as toppy as today’s. Moreover, short-term vol is higher than medium-term vol, so selling it daily for a shorter period of time optimises the entry point for the client.
There are now four indexes in this family of products – the Tier EU 4%, Tier Switzerland 2%, Tier US 4% and Tier EU 6%. Hedging is a simple business as the bank has very good access to the options market and can easily find offsetting trades, says Marque.
A 6% return is the magic number for clients, he says, adding that in a low-rate, low-vol climate they are willing to take on increasing risk. Asset managers, for example, need to generate alpha and compete with hedge funds but at a lower cost. Products that were once the preserve of only the most-sophisticated clients are now sought by a much wider range of clients, he says.
Correlation business has increased, and interest has shifted from instruments linked to single stocks to those linked to a basket of stocks. In the ceaseless quest for added yield, BNP Paribas has also introduced thematic indexes in which payout is linked, for instance, to the outcome of the recent French presidential election or corporate buy-backs.
Central to the bank’s strategy for meeting burgeoning client interest and retaining existing customers is its Smart Derivatives platform, which has 3,700 users in 40 different countries and sees around 200,000 trades priced every year. Clients can manage all of their structured products online and BNP Paribas continues to introduce upgrades and improvements, such as adding rates products in 2017.
“We have been impressed by BNP Paribas’ dedication to drive better customer outcomes, and their range of committed to the future (CTF) products are a real game-changer,” says Andrej Ogorevc, head of structured products at UK-based wealth manager Old Mutual Wealth. “We would endorse their customer-focused ethos and we greatly value the ongoing support and service we receive from them.”
The week on Risk.net, September 8-14, 2018Receive this by email