Equity derivatives house - BNP Paribas

BNP Paribas has leaned on its credit quality and continuing reputation as an innovator to drive the European market further forward. While an AA+ credit rating has ensured walk-in business and the retention of the bank's broadly based and regular distributors and investors, BNP has also produced new products that meet the needs of a market that has been uncertain, volatile and often distressed.

"Before the summer, volumes were still growing," says Jean-Eric Pacini, London-based head of structured product sales, equities and derivatives at BNP Paribas. "Then there was a shift in the nature of the product necessary to cope with market intensity." Retail is different, being more relationship than transaction driven; private banking was driven by autocallables that do not autocall; and own-account investors changed tack to more efficient hedge solutions following the demise of Lehman Brothers.

Meanwhile, the flow business was very active for hedge funds and asset managers, says Wojciech Nabialek, head of equity structured products at BNP Paribas in London. "In the spring, there was a lot of innovative transactions trying new exposures, which we provided," says Nabialek. "The crisis came in the early summer, when complex products were put to one side. But vanilla flow trading on indexes was very efficient at the end of September and start of November."

A feather in BNP's flow cap came on October 1, when it finally assimilated Bank of America's prime brokerage business. "We have been viewed for many years as a top structured products house, and maybe the flow business has been less visible. Prime brokerage is the last piece for us to be an all-round flow house," says Nabialek.

The acquisition marks another plus for a business that distributors praise for its service, pricing and ideas. "Their pricing is good, they react to structures and they have a real ability to understand what clients need," says one European distributor. "If you need to tweak a structure, they think with you. They have a capacity to listen that is lacking in many banks. The entire operation works well together. Their support to sell and commitment to do the trade is very important to us."

In terms of innovation, the pinnacle was Platinium, the winner of this year's index innovation award (page 36). "Platinium is a very powerful concept recreating single hedge fund strategies. We started it at the beginning of 2008 and it went live in early March, implementing a simple, well-known hedge fund strategy, which could be equity market neutral or equity volatility arbitrage," says Nabialek.

Instead of selling one-month variance swaps, they are daily. "If you sell one-month variance swaps when volatility is at 40%, you can get killed," says Nabialek. "If you sell one-day variance swaps at 40%, you improve your selling price every day, but also you don't take any implied volatility risk. If you sell one-month variance swaps, not only would you get killed on the realisation in the last two weeks, but also your mark to market can be horrible because volatility can rise when you are short. Here, you don't have a mark to market because you only sell for the next day. It's a highly advanced implementation of a well-known strategy."

The steps forward the bank has taken this year have earned it the accolade from another European distributor as an "innovative, helpful and flexible partner".

"We are very happy in 2008 because a lot of what we designed and planned last year anticipated the market well," says Pacini. "All the brainpower investment we made in 2007 delivered in terms of product performance, and client interest and contribution." The three main additions are long volatility hedges, systematic strategies seeking absolute return, and more for the thematic index series."

VolEdge uses volatility as a hedge, providing exposure to pure volatility that reduces investor risk against volatility spikes. BNP packaged it into two very successful funds that received over EUR500 million of new investments during the summer, with VolEdge reaping a 30% gain while the Eurostoxx was down 8% in the first two weeks of September. "The success was in its reactivity to the market and its liquidity," says Nabialek. "It is daily, but also tight in terms of bid-offer spread because it is simple and quite easy - it's an access trade." Pacini adds that "it was a clear progress from going long volatility with a variance swap."

Systematic products were best represented by Millenium, which was introduced in June 2007 and offered a 10% return in the year to September 2008. Sold across Europe, the product was particularly popular in central and eastern Europe and is now offered in emerging markets, sharia and socially responsible formats.

The bank's strategy of recycling has become more useful in a market that has seen dramatic losses on correlation. "In the product design process we try to incorporate correlation implicitly," says Pacini.