Mizuho tries its hand in European rates

Japanese bank bets on handful of deep relationships to compete in crowded European market

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A bank seeking to grow its rates business outside its home market might not think to look towards Europe, where competition is fierce and regulation dulls the benefits of client relationships.

But that’s exactly what Mizuho is doing. The Japanese bank has a new direction, new staff and bold ambitions to make Europe its bridgehead for an international push in rates trading.

“The key clients that we want to interact with are global. They want to trade globally, so we need to position ourselves globally. We have some work to do in this space because for the most part we are Asian dominant,” says Jason Cohen, head of rates trading at Mizuho International.

Cohen, who reports to global markets Europe, Middle East and Africa head Asif Godall, was brought on board from Citi in November to spearhead that initiative and expand the euro, sterling, dollar and yen linear rates trading business in Europe.

The plan is relatively simple, and a common one among mid-sized dealers in the euro rates market: establish a presence in electronic rates trading, but drive revenues by providing an all-round ‘high-touch’ service to a handful of ‘platinum’ clients.

The service aims to give clients access to sales and trading staff, research, commentary and strategy across asset classes. Cohen hopes to create a pool of over 50 platinu­m-level clients, one-tenth of what a larger house might have.

“We’re not going to be Citi, we’re not going to be BNP, we’re not going to be JP Morgan. But what we can be is relevant to a diverse client set that want to leverage Mizuho’s strengths,” says Cohen.

The client list will have to do without US names – for now, at least. The bank’s European entity lacks the Commodity Futures Trading Commission swap dealer designation that allows a dealer to trade with US-based funds, which make up around 40% of European rates trading volumes.

Who you know

Successfully executing that plan will be far from simple, though. Cohen hopes to do this by tapping connections from new staff and leveraging existing client relationships with Asian firms trading out of European or New York time zones.

The bank made a concerted effort to build out its rates franchise in 2013, says a source with knowledge of Mizuho’s rates business. But momentum stalled as the bank turned its attention to the credit business. Now, the focus is back on rates.

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Jason Cohen: “The key clients that we want to interact with are global… so we need to position ourselves globally”

“There is much more cross-selling opportunity in the liquid rates products – European government bonds, sovereign, supranational and agencies, and interest rate swaps – than there is in credit,” says the source.

The Asian unit drives the bank’s overall earnings, representing three-quarters of revenues and nearly half of net income for the fiscal year ending on March 31. Europe represented a measly 5% of the year’s revenue and 7% of the year’s net income.

Japanese insurance and asset management firms are among the world’s biggest holders of euro-denominated debt, while the country’s government pension fund is the single biggest holder of Bunds, with $16.4 billion worth on its books according to Bloomberg data. The organisations are active users of derivatives to transform cashflows of domestic and foreign bonds.

Cohen says a move to integrate its banking and securities divisions for rates will provide additional structural support to cross-sell services to these existing clients, though he did not elaborate on the change.

Crowded house

The bank is jumping into an ultra-competitive market where a number of banks compete for share not held by the top dealers.

“Europe is one of the most overbanked markets in the world,” says Michael Turner, head of corporate and investment banking competitor analytics at Coalition Greenwich. “Each country has its own domestic champion, as well as the global banks trying to come in, which means it’s incredibly competitive, especially for rates products.”

The top five banks collectively held an average of 45% of rates revenues for Europe, the Middle East and Africa in the last three years, according to Coalition Greenwich.

The region represents a sizeable chunk of the global pie, with revenues around one-third of the global total, including cash, linear and vanilla non-linear derivatives, repo and structured rates trading.

The competition in the marketplace has caused fixed income bid/offer spreads to grind tighter in recent years – notwithstanding a blip for Covid.

“Flow fixed income now is a really hard space to get into. Margins are very low, the market is pretty efficient,” says the source with knowledge of Mizuho’s business.

Electronic trading is not going to be necessarily a profitable, standalone business. Like FX, if you get it right, it can help you recycle other risks that you have from your high-touch clients

Jason Cohen

In Europe, the introduction of best execution requirements with Mifid II has forced buy-side firms to prove they are achieving the best price for clients. That can mean putting more dealers into competition and giving little preference to past relationships – which could work against Mizuho’s plans for its high-touch service.

Cohen says he is “under no illusions of how difficult this will be”. But being number one by undercutting rivals on price in the already cut-throat electronic market is not the goal.

Rather, the bank sees electronic trading as a “shop window” to attract clients and start a conversation about high-value services.

“Electronic trading is not going to be necessarily a profitable, standalone business. Like FX, if you get it right, it can help you recycle other risks that you have from your high-touch clients,” Cohen says.

In some corners of the market, electronic trading has become the norm. A Coalition Greenwich survey of 26 buy-side European swaps traders showed that nearly half of interest rate risk was executed electronically last year and nearly three-quarters of swaps volume went through a platform’s request-for-quote protocol.

But electronic trading is not the norm in Japan, where rates is “predominantly a voice business”, says Cohen. As a result, Mizuho has had to spend money upgrading its technology to meet market standards.

Blank canvas

Cohen joined Mizuho last November following a 12-year stint at rates powerhouse Citi, where he worked latterly as head of European swaps. Earlier in his career, Cohen ran the yen swaps book at Merrill Lynch in Tokyo and held positions at Goldman Sachs and German bank WestLB before landing at Bear Stearns in 2005 where he headed the euro swaps trading desk.

Cohen says it didn’t take much to sell him on the Mizuho position.

“It seemed to me like a blank canvas in the sense that I could come in and try and build a client-facing franchise, which is something I think I’m good at,” he says.

Cohen’s arrival heralded a shuffling of personnel within Mizuho’s rates business a few months later. Out of the door went head of US dollar swaps Shakeel Jaswal, head of rates sales Jean-Baptiste Aussourd, managing director of rates sales Paola Roca, and executive director for rates sales Daniel Vicen.

In came Kevin Broughton, who previously worked at RBC, and David Li from Millennium Capital Partners to join the swaps desk in London, and Andra Belcea from Societe Generale as head of cross-currency swaps. Julian Moosuddee now leads UK rates sales, arriving from Barclays Mauritius. Overall headcount has grown as a result of the restructuring and merging of divisions.

Leaning on client connections brought in by new hires is only part of the plan. The bank also hopes to take advantage of its Asian franchise by picking up European business from existing clients and getting on the radar for new clients looking to trade Asian products.

“Our strengths are going to be our Asian franchise, where we can potentially open doors to non-Asian clients by leveraging the franchise – Japanese government bonds, yen swaps or other liquidity pools that we have in Asia,” says Cohen.

Mizuho Securities has the largest market share in Japanese government bond trading and ranked first for Japanese domestic bond underwriting by volume, as well as asset-backed securities volume where it served as a lead manager, the bank claims. On domestic and cross-border equity underwriting, the securities business ranked second.

“We can be a top three or four for those clients. You want to be a second or third call potentially with those key clients,” says Cohen.

Cohen gives the combined efforts in electronic trading and high-touch client services a year to start showing meaningful revenue impacts.

Editing by Alex Krohn

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