House of the year - Barclays Capital

It has been the year of risk management, with innovation more a matter of careful tweaks than reinvention. Through the ups and downs that started with volatility spiking beyond all recognition and finished with investors expressing a lukewarm yearning for equities, Barclays Capital stood out as the navigator that could offer advice and products for all asset classes, while never taking its eye off the models that ensured its own business would be secure for the future.

Being called diligent and cautious has never been the greatest compliment in the flashy world of investment banking, but during the past 12 months these terms became the accolades that all aspired to.

The first requirement on the list of prudence was management of risk. “This was the period of risk management, and really separated those that had it from those that did not,” says Dixit Joshi, head of equities, Europe, the Middle East, Africa and Asia-Pacific at Barclays Capital in London. “We had started managing risk at a granular level. , Because volatility was low, there was a tendency at most places over the preceding five years to hedge one instrument with another with very little tracking error and very little apparent risk. Of course, all these risks then started materialising.”

Investment in technology and the creation and bolstering of its risk management systems over the preceding five years meant that BarCap avoided the massive correlation and dividend losses in the last quarter of 2008 that hit most of its competitors. “When you want to lay off risk… you can do variance dispersion, straddle dispersion, simple option call dispersion or correlation swaps,” says Joshi. “But they all have a vastly different risk profile when you look at how they behave in a crisis. When volatility and correlation were low some of these instruments appeared to be a great hedge, but they don’t perform well in the event of turmoil, when you have high volatility, high correlation, and a market that has gone down.”

Competitors recycled risk through instruments that were the wrong hedges for the crisis, such as correlation swaps. “There was this false sense of comfort around some of these hedging instruments,” says Joshi. As well as recycling risk to some of the more conventional buyers, such as hedge funds, “we are now also tapping into real money accounts across Europe,” says Joshi. “We have hired a large derivatives flow sales team in Europe – about 25 or 30 people – which is focused primarily on long-only fund managers and institutions in Europe, which has opened up a new avenue of recycling single-name risk.”

“The crisis began around the end of July 2007; liquidity dried up; risk arbitrage strategies started being delivered, which had a ripple effect through the hedge fund and strategy space,” says Joshi. “We took a step back in August, when we recognised a regime change, moving from low to a high volatility. We took a view that correlation would go up as deleveraging becomes indiscriminate, which in turn leads to correlation going up as investors liquidate all assets at once. The hedging tools you had at your disposal before were not going to be there because the funds that participated in all of those hedges were going to be backing off, given their own issues around leverage and liquidity.”

“We had done lots of analysis on dividends,” says Joshi. “At the end of 2007 and the start of 2008 before the big downturn in dividends, we took risk down. In many cases with structured notes, we got short dividends in anticipation of more flow. We were in pretty good shape.”

“Our hit rates dropped off – it was clear that others were not taking this approach,” says Joshi. “The risk premia in all asset classes had gone up, and here was one place where it had not gone up. When people came to us saying we were losing transactions, we walked them through where prices were, where they cleared, showed them the brokers quotes, and explained to them how the Totem marking process worked. It didn’t really change the outcome, but it did help them understand where we were coming from.”

BarCap continued to provide liquidity and new products. “We were always in the market making prices,” says Colin Dickie, director at Barclays Wealth in London. “There was never a time when a client would not get a price.” Richard Ager, head of BarCap’s equity derivatives structured products operation in London adds that “the prices reflected the risk as we saw it.”

While BarCap was not immune from the questions that were asked of almost all banks at the end of 2008, any lingering doubts about its adequacy as a counterparty have long disappeared. “We had concerns at the end of last year, at a time when we removed all American banks from our provider list, but we are looking to add BarCap by the end of this year,” says one Belgium-based distributor.

For a bank that was competing to buy ABN Amro at the height of the market, and one that decided to hold firm and not take government money, BarCap has emerged from the financial crisis in better shape than most of its regular competitors. “Barclays has good products, good service and is competitive on pricing,” says one Italy-based distributor. A UK building society official concurs, saying: “They have an interesting array of products.”

Hassan Houari, London-based managing director at Barclays Capital, says: “When the market blew up in summer 2008, and particularly after the Lehman Brothers bankruptcy, we had all the counterparties coming to us saying that we were correct in our analysis and they awarded us a very good chunk of the Lehman replacement trades. We did 25% of the Lehman replacement trades in Europe.”

The Lehman link became even stronger once Barclays acquired the defunct bank’s US business, a move that catapulted Barclays back into equities, an asset class that it had departed nearly 10 years previously. “We bought the Lehman equities business in the US and then quickly worked on our build-out in equities from January,” says Joshi. “Whereas most people had cash and built out derivatives, we had derivatives and built out cash. We have hired around 750 people in Europe and Asia, about two-thirds in infrastructure and a third for the front office.

“From the get-go, we have made sure they realise it is one equities business. It’s the only build-out in the Street in the past decade or two. In research, we went from zero to 75-strong research team in Europe this year. Our traders now, in terms of risk management, have an additional ability to manage risk,” says Joshi.

Product plaudits are in abundance. “They have good pricing and good speed of service,” says one UK-based distributor. “Their documentation is good and easy, and they were not hit by the Keydata bankruptcy.”

The bank was also in the clear when NDFA, another UK plan manager, entered administration. “Barclays Capital is diligent and makes execution happen,” says one official at a UK-based US private bank. “There is no problem with bids and liquidity, and we like counterparties that are good in all asset classes. Of the counterparties we use, Barclays has one of highest credit risks, and provides most competition on longer-dated products.”

The product range spans the asset classes, with the bank taking this year’s Structured Products award in Europe for foreign exchange, and offering good competition in the interest rates, commodities and equity derivatives categories. Interest-rate floaters have attracted more than E1 billion of client’s money over the last few months, according to Jane Balen Petersen, a London-based director at BarCap.

Corals, the index underpinning a commodity-based structured product and first launched in February 2008, has attracted $700 million of investment from pension funds, insurance companies and retail investors. “The index takes a position in commodities on the basis of economic fundamentals,” says Uwe Becker, Frankfurt-based head of retail structured products for Europe at BarCap. “Larger, supranational asset managers bought into the concept and the structured products that go with it.”

“Corals was a success as a Delta 1, Ucits III, capital-guaranteed note and as an index, and we sold it to private banks across Europe,” says Balen.

While further cementing a private banking franchise for which Barclays has long been renowned, the bank has further developed its institutional business while extending its footprint across Europe. “Barclays are top of the list for responsiveness,” says a Zürich-based official at a large wealth and asset management company. “They are hungry for business, quoting in minutes. [Their business in Switzerland] is more efficient than [the large local providers].”

Products were passported into Germany via the Barclays Capital Fund Solutions (BCFS) funds platform, with two flagship funds (TAP 4 and Income Plus) offering a collateralised structure. Private banks and retail in Germany were particularly interested in BarCap’s one-touch autocallables, while retail bought commodity-based products. In Germany, the bank was first to market, adapting to investor demand with a series of simple products including Floored Floaters, One Touch Autocallables and its Turn of the Month delta-1 seasonal strategy. “We added 100 new intermediaries in Germany, and Dresdner and new owner Commerzbank are very close to us now,” says Balen.

In Italy, the bank had success listing vanilla structured products on the country’s main stock exchange Borsa Italiana as well as marketing directly to end investors in partnership with Barclays Italia. “We made floaters accessible to many investors and were first to list on these on the exchange, offering transparency and liquidity,” says Becker. “Italian retail was a new delivery channel for us in 2009,” says Balen. “We created very vanilla listed products for them and sold them around E500 million in August.” BarCap plans to launch more of the same for the Spanish market this November, “with another couple of countries to follow by the end of the year,” she says.

 

Plans for November include the building of the iPath platform in Europe. “These are structured notes that work like ETFs,” says Becker. “They are delta 1 but give access and liquidity never seen before. They make volatility investable for retail.”

The bank has also extended the use of Barx Investor Solutions, its structured products e-commerce platform with live bid-ask prices for secondary market structured products across equity, commodity and interest rate products, and has also heavily invested in expanding its educational platform. “Seventy-five percent of all our trades in structured products were done online on the Barx platform,” says Becker.

Algorithmic strategies, such as Radar (Research Analysis-Driven Absolute Return strategy), were popular with private banking. The same buyers were also quick to take up Switchable Notes. “Autocallables were popular across the board: we tweaked this with our switchable notes as clients said: ‘great, your callable event is quite clear, but then when it happens you terminate the product,’ so there is an uncertainty of maturity, which was a problem for some. Switchables keep the product at a fixed maturity. The notes were especially popular in Spain, says Balen.

“We have also had success with Balsam – Buy At Low Sell at Max – over the past couple of months,” says Ager. “Over time, people want equity in their portfolio and it is a question of when and how do they get back in, and how long do they invest for? The traditional techniques are averaging in and lookbacks, but lookbacks are expensive. Balsam includes a running average over three months as the strike. The final value is the highest monthly observation over the term. Participation is set at 70%.”