French banks BNP Paribas and Societe Generale have pumped almost €1bn into two little-known proprietary trading operations, showing that so-called prop trading has not died out for all banks despite regulatory changes that seemed to outlaw the activity.
BNP Paribas has injected €600m into a company called Opera Trading Capital, which has 21 traders in London and Hong Kong, according to details of the business seen by IFR.
Opera Trading had assets of €2.6bn, annual revenues of €32.5m and made a pre-tax profit of €7.9m in 2015, the last period it has published accounts for. Opera Trading’s accounts for 2015 say it operates as BNP Paribas’ prop trading arm.
Societe Generale has put €371m into a company called Descartes Trading, according to UK filings. The accounts say Descartes is fully owned by SG and conducts proprietary trading on its behalf. It has about 20 staff in Paris, London and Hong Kong.
Both subsidiaries were set up in 2015 to comply with French regulations introduced to separate and regulate banking activities (SRAB).
Opera Trading’s accounts say it is “dedicated to the proprietary trading activities carried out by BNP Paribas, that have not been exempted with regard to the SRAB law”.
The two subsidiaries are entirely legitimate, but their existence - and the fact that both banks are reluctant to talk about them - highlights the lack of clarity on what banks are allowed to do in terms of prop trading, and how the rules differ by country.
BNP Paribas and SG both declined to comment and little is ever said about the companies.
DISAPPEARING ACT
Indeed, prop trading is rarely talked about across the industry, partly because there is a perception that all banks have stopped the activity - and those that haven’t perhaps don’t want to bring attention to their activities.
Major US banks have been banned from carrying out certain “speculative investments” since July 2015 under the Volcker Rule. The intention was to stamp out an activity that many regulators said contributed to the 2008 financial crisis. No pan-European rules to stop prop trading have been set, but some countries have imposed restrictions.
Basel capital rules also forced banks to hold more capital for trading activities, making it more costly. Bankers said the combination of Volcker and capital restrictions had prompted most major banks to scrap the business completely - many in the industry assumed that straightforward prop trading by banks had simply disappeared from the landscape.
“Although it [Volcker] is a US rule it’s had a global impact … it’s forced virtually all the big banks to exit prop trading,” said a source at a major bank.
Many banks - perhaps most notoriously Goldman Sachs and Deutsche Bank - used to make significant revenues from prop trading.
The activity accounted for about 10% of equities and FICC trading revenues at major investment banks in 2007, according to analysis firm Coalition. But Coalition estimates that percentage was reduced to less than 5% of trading revenues between 2009 and 2013, and it has fallen to less than 1% in each year since 2014.
WHAT’S PROP?
But defining prop trading is difficult, and involves some grey areas.
Banks are allowed to conduct market-making, which involves holding positions for clients and inventory. Banks also have treasury or balance sheet management operations that hold big positions for hedging or liquidity, and often make substantial profits.
“Prop trading officially doesn’t exist. Actually it does exist, but it’s in a very different nature in this day and age,” one industry source said, referring to some banks’ efforts to prop trade on the quiet via market-making and balance sheet activities.
There can be great variance in the size and duration of inventory that desks hold, bankers said. That’s why US regulators require banks to keep extensive records proving transactions are in compliance.
Deutsche was fined US$20m last month for failing to adequately monitor transactions to comply with the Volcker Rule, becoming the first bank to be punished for that failing.
OPERA TRADING
But back-door prop trading is emphatically not what the two French banks are carrying out. Their efforts are entirely legitimate under French rules.
Opera Trading’s 2015 accounts said the business was approved in April 2015 by ACPR, France’s banking regulator and supervisor.
The accounts acknowledged the restrictions imposed by some regulators: “As a BNP Paribas subsidiary, the company is also subject to the Volcker law.
“The company has set up an internal Volcker Rule compliance procedure, though the company is eligible for the TOTUS (Totally Outside the United States) exemption,” the accounts said. It said Opera Trading compliance reports to BNP Paribas’ CIB compliance function and can use their expertise.
The accounts said discussions about a Europe-wide prop trading ban would “call into question the company’s very existence” but said based on its latest information that risk was limited.
The accounts show Opera Trading raised €599m of capital in April 2015, increasing its capital to €600.1m at the end of 2015. BNP Paribas owned 99.99% of the business. Opera Trading also received a subordinated loan of €86m from BNP Paribas in June 2015. Its assets equated to 1.3% of the bank’s total.
It opened two branches in London and Hong Kong. The head office is listed as in Paris.
“The employees of Opera Trading Capital are seconded employees of BNP Paribas SA and BNP Paribas Arbitrage SNC,” the accounts said.
The accounts detailed a number of activities. Its rates activity, for example, seeks to benefit from global macro trends and changes of monetary policy by taking positions on the rate curves of the main currencies. Its risk arbitrage strategy involves capitalising on situations in equity markets that may arise from M&A arbitrage opportunities.
The accounts said Opera Trading’s chief operating officer was Stephane Liot, who signed off the accounts. Liot was previously global head of proprietary alpha strategies at BNP Paribas and has worked at the bank since 1996, according to his LinkedIn account.
Opera Trading’s chairman is Olivier Osty, who is also head of global markets for BNP Paribas. Its five other listed directors all work for the bank.
Opera Trading said it used Deutsche Bank and BNP Paribas as its two prime brokers. The accounts said its budget for 2016 was €167m, an increase from 2015.
DESCARTES TRADING
Accounts for Descartes Trading’s London operations said the business had assets of €2.1bn at the end of 2015, equivalent to 1.5% of Societe Generale’s total assets.
Descartes Trading ended 2015 with capital of €377m, the accounts said.
Its trading activities included equity arbitrage on shares and convertibles, credit and government securities, and interest-based trading and quantitative volatility strategies.
