Blurring the boundaries

For the past year Nomura has been growing its equity derivatives business and it is now firing on all cylinders, according to its head, Joachim Willnow. The idea is to blur the boundaries between traditional investment banking and asset management approaches. But will the strategy work? By Paul Lyon

When Structured Products launched in October 2004 Nomura was the talk of the City. The Japanese bank had hired Joachim Willnow from well-established rivals Merrill Lynch, and Willnow proceeded to lure over his former colleagues, and other talent, promising them the excitement of starting an equity derivatives business from scratch. Now the team is fully staffed at around 50, and Willnow, who oversees the global operation from London, says the bank is ready to prove that it has something unique to offer.

Last month, Nomura announced that it had executed more than $500 million worth of structured transactions across Altrus, its new equity derivatives trading platform, which encompasses bespoke structures, notes, certificates, warrants and funds. Altrus – which is effectively the brand name of Nomura's structured products business – is set up to take products from the trading floor and bring them more successfully to the market, by offering services and skills that assist product providers and distributors, Willnow says.

The right blend

One way that Altrus can achieve this, Willnow argues, is by blurring the boundaries between investment banking and asset management. It's a trend that is set to continue, but Nomura has first-mover advantage by deliberately aligning its business to recognise the development, Willnow adds. Earlier this year Morgan Stanley released a report that recognised how asset managers, which position themselves as structured products specialists, are likely to enjoy greater profitability than traditional managers. And market participants appear to agree that structured products are becoming an increasingly important component of an asset or fund managers' portfolio. Nomura is keen to blend the investment bankers' derivatives know-how with the asset manager's distribution capabilities, Willnow says.

As an example of Nomura's commitment to the asset management and fund management space, Willnow cites his recruitment of Garry Topp, from SRI Advisors. Now Nomura's director of equity derivatives with a focus on fund sales, Topp has also worked at Henderson Global Investors where he was responsible for developing and distributing products in retail and institutional markets.

What's more, Topp says, Nomura has also been careful to hire a number of specialist lawyers, who, unusually, sit with the equity derivatives traders and structurers. "The idea is to give Nomura's clients easy access to market knowledge such as the intricacies of Ucits III (Undertaking for Collective Investments in Transferable Securities) which allows funds to be passported across EU member states when domiciled in a member country," Topp says.

Innovation

In fact, says Michael Fullalove, Nomura's managing director of product development and fund derivatives, the move to provide such services as an integral part of the Altrus business is part of Nomura's ambition to prove that innovation can come in more forms than simply the shape of the product payoff. "We're certainly capable of innovating with product payoffs but we also want to innovate at the wrapper level," Fullalove says, adding that Nomura is currently looking to launch some interesting structured products tied to funds of hedge funds. "Investment banks are the engine behind structured products, but they have tended to exist in isolation, effectively refusing to offer the after-sales service and support that is so vital for educating all facets of the market," he says. Nomura is actively targeting IFAs, discretionary managers, family offices, high-net-worth individuals and banks with large distribution networks.

Nomura has already closed its two fund-linked derivatives deals – both leveraged share class deals for funds of funds. Fullalove also expects to complete a few CPPI products in the near future and is exploring the opportunities of launching products linked to single hedge funds, mutual funds and hedge fund indexes. In its home country, Nomura is also working on a capital-guaranteed fund of hedge funds product. Fullalove also says that Nomura is working hard to deliver correlation products, or "the final piece of the puzzle."

Nomura is also jumping on the commodities bandwagon. But, in a departure from the norm, Nomura will distribute its commodity product in the German market, which, relatively speaking, has been less open to commodity investments than some of its EU neighbours. Other products on the table include a Dublin Oeic, which should be launched by the end of this month, and property-linked products. Nomura also plans to launch a number of multi-asset class products, although its executives could not provide specific details of what these might entail.

What is certain is that Nomura will offer Altrus-branded and white-labelled products, Willnow says. And, as long as long as the European roll-out of Altrus proves successful, it is only a matter of time until the bank invests in bringing structured products to the US, he adds.

Delays

Despite being upbeat about the future prospects of the Altrus brand, Willnow concedes that development of the business "has taken longer than we thought it would". For a start, Nomura has been careful to fully align its trading systems, investing in an off-the-shelf risk management and pricing system bought from Paris-based risk technology firm Sophis to support the effort. Nomura has also developed certain parts of its trading capabilities in-house.

The bank has also been careful not to blindly accept new markets as potential business opportunities. When it comes to sharia-compliant products, Fullalove is unsure of their prospects. During his time at Merrill Lynch he worked on selling sharia-compliant products but his efforts were met with little success. "There is already a lot of competition in this space and the effort needed to make a success of the area would not necessarily be warranted," he says. "The nature of a sharia committee also makes approving the products problematic."

Other banks, however, notably Deutsche (see Structured Products, May, p.4) and BNP Paribas, are making a concerted effort to grow their sharia business. And Nomura is also standing out from the crowd in its attitude towards accounting standards.

The implementation of International Financial Reporting Standards (IFRS) last January could make it more difficult for dealers to enter the structured products business, following new rules preventing firms recognising profits on some structured product trades from day one. Under previous accounting rules, any profit on a structured products trade could be booked on the day it was transacted, known as day one profit and loss (P&L). But under the IFRS system, and in particular International Accounting Standard 39 (IAS 39), profit margins on a trade can only be booked upfront if the market parameters used in banks' proprietary valuation models are deemed directly observable in the market. If not, the profit has to be amortised over the duration of the trade, although not necessarily in a linear fashion.

Banks that already have sizeable structured products businesses won't see much impact on their margins but the new accounting rule could create problems for banks wanting to enter the structured products business for the first time, according to some, including Christophe Mianné, global head of equity derivatives at Société Générale in Paris.

Those newcomers would have low profits from previous years, reflecting the small amount of structured products business they transacted before January 1. If these firms are looking to ramp up their structured products significantly, the amortisation of profits from past trades may not be enough to compensate for the extra business the firm is doing. That means it could have low profit margins under IAS 39 for four or five years, and a relatively high cost base, Mianné argues.

Nomura is certainly aware of the accounting laws, Willnow says. But, as with all new rules, the final outcome is never black and white. In fact, he says, the bank is not worried in the slightest and looks set to hire even more specialists now his department is confident of contributing to the bank's P&L in a big way.