A steady hand
Geopolitical uncertainty and depressed client activity have made it a challenging 12 months for banks’ trading businesses. For burnishing its credentials as a global derivatives house through expanding its European operations, while maintaining its reputation as a steadfast trading partner, Bank of America is IFR’s Derivatives House and Interest Rate Derivatives House of the Year.
Bank of America’s ascent into the top-tier of derivatives dealers has been the culmination of many years of hard work following a chastening period for the bank in the early part of this decade.
The crisis-era merger of Bank of America and Merrill Lynch came under intense scrutiny following ratings agency downgrades in 2011 as part of a wider reassessment of the US banking system. BofA’s cost of credit default swap protection blew out to just below 500bp, according to IHS Markit, far above the level it reached following the financial crisis, and its share price dipped below US$5.
That episode was a sharp wake-up call for senior management – and one that BofA has never looked back from. At the heart of the strategy for expanding its derivatives business has been a rigorous approach to allocating capital under the post-crisis regulatory framework, continuous investment in infrastructure and talent, and a consistent drive to be a dependable counterparty for clients.
BofA’s stock price has since recovered to US$33 and its CDS is now close to 40bp. Its markets business, meanwhile, regularly ranks among the largest in terms of revenues, while running a smaller amount of risk than many peers.
“It’s been a multi-year strategy,” said Bernard Mensah, co-head of global fixed income, currencies and commodities trading. “Over a five-year period we’ve been gaining market share and we’ve been less volatile than others.”
Take the fourth-quarter last year, when many firms struggled with a sharp sell-off in equities and corporate debt markets. BofA’s FICC trading unit notched a fourth-quarter revenue decline of 15%, but that was the smallest among the big five US banks. It was also a repeat of its quarterly outperformance in the poor end to 2017 for the largest US banks in fixed income.
BofA also avoided the pitfalls of some of the largest equity derivatives desks in late 2018 when the concurrent fall in stock markets and volatility hurt banks with large structured products positions. BofA’s equities specialists had become wary of how aggressively rival banks were pricing autocallables, the most popular type of retail structured note, and had preemptively stepped back earlier that year.
“My main focus has been to create a model of originate to distribute,” said Hichem Souli, head of global equity derivatives structuring. “We didn’t want to fill our books with risk.”
That conservative approach to risk management can be seen in the low amount of value-at-risk run by BofA’s markets business, a gauge of how much the firm could potentially lose given its trading positions. Even during the volatile fourth quarter of 2018, BofA’s markets unit’s average VaR was US$36m, well below other major US investment banks.
“Ours reflects a real client focus and dependability … and being judicious with the financial resources we use to drive the business,” said Mensah.
Expanding its reach in Continental Europe has been a central pillar in its growth strategy this year, as Brexit forced the bank to establish a greater presence in mainland Europe. But rather than opting for half-measures, BofA has used the opportunity to gain greater traction with European clients. It has thrown serious resources into establishing a roughly 400-strong Paris office complete with sales, trading, research and operations, as well as corporate and investment banking and support roles.
Senior staff, including the unit’s head Sanaz Zaimi, who also heads FICC sales globally, have given clout to the Paris office. Other high-profile members of the Paris office include Vanessa Holtz and Othman Kabbaj, who head EU FICC trading and sales, respectively, as well as Arnaud Lannic and Christian Treuer, who head EU equities trading and sales, respectively.
Whatever the political outcome of Brexit, BofA is ready, having set up a Paris-based derivatives clearing broker and built local connectivity to the relevant exchanges.
“We’ve been extremely clear on our Brexit strategy from the beginning. We wanted to make sure we offered continuity in services to our clients,” said Holtz.
BofA’s European expansion has played an important role in one of the bank’s most impressive growth stories over the past year or so: its rates trading unit. BofA has long been strong in US and UK rates, but it had room to grow in Europe.
It has done just that. The bank has tripled its market share in euro and sterling swaps since 2017, said Snigdha Singh, head of EMEA flow derivatives, while its rates derivatives business has posted double-digit growth each year for the past two years.
“The Brexit strategy and having the Paris office really helped us get closer to our continental clients,” said Singh. “We’re closing the gap versus the competition, but also versus our US business."
Getting ahead of regulatory reforms remains a key focus for the bank. This year, BofA has devoted a lot of time to working with clients on the transition away from Libor, as well as offering new products and indices on alternative reference rates. Clients, for their part, are happier than ever.
"For us, they’re top tier,” said Lucas Bouwhuis, a senior portfolio manager at Achmea Investment Management in the Netherlands. “They’ve moved to their offices in Paris and they’ve picked up the coverage really well. They clearly have a strong commitment to this area.”
BofA has invested to expand its structured rates franchise too. That has coincided with a steep increase in the trillions of euros of debt yielding below zero this year, triggering a ferocious scramble for returns among clients. Areas of focus have included risk-premia strategies, financing trades and using the multi-dealer platform Spire for bond repackagings.
“It’s very important in these markets for clients to find yield-enhancement solutions and to find leverage for term,” said Singh.
That growth in the structured space complements one of BofA’s main businesses: credit derivatives. Here, BofA’s prowess in risk-premia strategies, Spire-structured notes and financing through total return swaps show the breadth of its client offering.
The bank remains one of the few dealers offering the full range of credit products, from standard CDS indices right through to index tranches and more tailored solutions for clients.
“Our credit business has really been our strength. It’s where we can deliver the firm,” said Mensah.
In currency derivatives, BofA has made significant headway in three main areas: providing bespoke solutions for middle-market corporate clients; becoming a top-three counterparty to targeted real-money investors; and unifying its FX options business into a single team to expand its footprint and improve its market offering.
“In FX, our strategy has been to be consistent: to be there when times are good but when times are tough as well,” said Holtz, who also heads G-10 FX options trading globally.
BofA has made its mark in several areas in equity derivatives, including the US fixed index annuity market. Adam Politzer, a senior vice president at Athene, went to BofA with a problem after another bank had run out of hedge capacity on a popular index the annuity provider was offering.
“We needed great performance, great liquidity, a simple story that we could market and a large amount of hedge capacity,” said Politzer. “Bank of America has created something very innovative for the fixed index annuity space.”
Meanwhile in the increasingly competitive quantitative investment strategy space, BofA has increased assets in equity derivatives strategies tenfold over the past several years, zeroing in on equity volatility as one of its specialist areas.
“We have invested dramatically within the last five years within our franchise,” said Souli.
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