Equity Derivatives House: Morgan Stanley
Equity derivatives took centre stage in 2013 as stock markets rallied across the globe. Japan stole many of the headlines but it was a year in which global reach paid dividends. For building one of the most diversified franchises by geography, product and client type, Morgan Stanley is IFR’s Equity Derivatives House of the Year.
There was no shortage of banks laying claim to record results in their equity derivatives businesses in 2013. But while many houses were quick to capitalise on a surge of activity in Japan as investors piled into derivatives to leverage their bets on the Abenomics-driven Nikkei rally, few could boast a truly diversified model that was able to reap all of the benefits of improved equity sentiment around the world.
Morgan Stanley could. The bank’s equity derivatives build-out got under way in 2008 with a content-driven, client-centric approach, and while many competitors had similar ambitions in the wake of the financial crisis, few managed to navigate the headwinds so successfully.
“For us, content is at the centre of the discussion and we’ve tried to build a derivatives business with that as the central tenet,” said Alvise Munari, global head of equity derivatives distribution and financial engineering at the bank.
“We don’t like to think of ourselves as a product-driven derivatives house. We like to think of ourselves as a content-driven derivatives house.”
The combined strength of the bank’s US equity pedigree and capabilities in Japan, boosted by Mitsubishi’s 22% stake in the US house, proved a recipe for success. In the first three quarters of the year, equity sales and trading revenues totalled US$5.1bn – almost 11% up on the previous year.
While Japan stole most of the equity headlines, it was the US that proved to be a crucial revenue driver for Morgan Stanley’s business as the S&P 500 soared more than 20% to hit record highs.
“We’ve had a phenomenal year in the US across all of the client segments and all products. It’s a function of the economic cycle and of us being more advanced in equity. We think we’ve outperformed in the US and certainly have the largest equity derivatives business there,” said Munari.
Structured around four main product areas – index, single stock, exotics and corporate derivatives – the business operates as a matrix with the four client segments of retail distribution, asset owners, high-velocity trading and corporates.
“We’re more balanced than we’ve ever been and while we’re comfortable with the Japan story, we’re equally comfortable with the US, Asia and Europe. The fact that any one of those stories could disappear tomorrow isn’t something we need to worry about,” said Matt Renirie, European head of flow derivatives sales. “We are quickly able to distribute resources across the globe wherever we see opportunities.”
And the bank believes the next opportunities will be in Europe. Although not the strongest part of its EQD franchise, Morgan Stanley made significant gains in the region.
“Our exotics books are some of the largest in Europe – there are only one or two houses that have a bigger book than us, but the quality of the business tends to be very good,” said Munari.
The bank frequently dominated daily EuroStoxx derivatives flows, which it attributes largely to significant technology investment.
“We’ve seen a 70% year-on-year rise in index and single-stock trades with the same number of people and we should see the same in 2014. It’s all to do with technology,” said Renirie.
The bank’s client-focused Matrix platform allows users to track trades as they pass through clearing, reducing operational risk. The platform was enhanced to include STREAM, a comprehensive structured products analytics tool with automated pricing capability.
A custom index platform offers clients tailor-made solutions including dynamic volatility indices, alpha strategies and alternative beta solutions.
As part of that offering, the bank’s hedge fund alpha strategy SmartInvest, which picks stocks based on hedge fund conviction, raised over US$400m in the first nine months of the year, while the VolNet dynamic volatility strategy saw total notional of almost US$800m executed between the June 2011 launch and the end of the third quarter of 2013.
“Morgan Stanley’s VolNet strategy is a genuine innovation in the volatility space,” said a UK wealth manager. “It demonstrates their ability to put together innovative solutions with strong risk management features.”
In the corporate market, the bank was able to secure a slim 0.5% discount as Daimler sold its €2.3bn stake in EADS, using a call spread structure. Executed on the day of the Boston bombings, the deal came amid huge volatility.
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