Foreign Exchange Derivatives House: BNP Paribas

IFR Awards 2019
5 min read
Christopher Whittall

Techno beat

Low volatility in foreign exchange has made it hard for banks to gain ground in this highly electronic market. For increasing market share through technological investments and helping provide innovative solutions for clients in emerging markets, BNP Paribas is IFR’s Foreign Exchange Derivatives House of the Year.

It hasn’t been a banner year for foreign exchange markets. The euro-dollar exchange rate, the lifeblood of currency markets, has traded in its narrowest range since the birth of the common currency almost 20 years ago. FX volatility is hovering around multi-year lows.

Against this challenging backdrop, BNP Paribas has made substantial strides in FX derivatives. The bank has recorded a sharp uptick in trading volumes following sustained investment in technology. All the while it has continued to be at the forefront of helping corporate clients manage complex risks in more volatile emerging market currencies.

Those efforts have shone through in BNP Paribas’ impressive fixed income earnings this year, with senior management referencing the strong performance of foreign exchange trading in its last three quarterly results announcements.

“In a lower spread environment you have to do more volume in order to sustain revenue growth. That requires an investment in technology and resources,” said Neehal Shah, BNP Paribas’ global head of G-10 FX trading.

“Foreign exchange has high barriers to entry … and there can be a lot of inertia when it comes to change. We’ve decided to tackle that head on.”

BNP Paribas has made a series of strategic investments in its electronic trading and pricing infrastructure for spot FX and derivatives across developed and emerging markets currencies that have started to bear fruit.

An improvement in the competitiveness and consistency of its pricing has led to substantial growth in market share across products, with average daily volumes up 60% since the second quarter of last year. BNP Paribas is now among the top five liquidity providers on all the major multi-dealer platforms, the bank said, and has been the top provider for non-deliverable forwards on Bloomberg and FXall for the last four months in a row.

“If you get your IT and your technology right, you’ll get your FX business right,” said Joe Nash, chief operating officer for digital FX, at BNP Paribas. “To have a scalable FX business that works ... you need to have a functioning technology business.”

Part of BNP Paribas’ success has come from analysing market liquidity to inform trading decisions for itself and clients. That can help differentiate between market moves backed by high volumes versus flash crashes caused by a lack of liquidity.

Shah gives the example of how technological analysis has helped BNP Paribas traders manage risk around US non-farm payrolls, revealing FX options have typically implied a bigger market reaction than what has tended to follow the data releases over the past 12 months.

“In a low volatility environment, it’s all about pricing event risk,” said Shah. “One of the reasons why we’ve been able to print much more in volume from our options desk is because we’re more comfortable providing that liquidity to clients.”

The sweeping overhaul of BNPP’s technology capabilities has also included an upgrade to its FX execution algorithms for clients and the roll-out of more market analysis tools. Clients say they are happier than ever.

“BNPP is a strong bank counterparty,” said a treasurer at a large US corporation. “They price well, they bring good ideas to the table, and in terms of their technology development, their algo product … does a good job in the market for us”.

BNP Paribas’ strength in providing hedging solutions for corporate clients coupled with its presence in local markets has come to the fore this year.

The bank provided a contingent FX hedge for a French conglomerate acquiring a listed Indonesian company for around US$600m, settling in rupiah two days prior to the deal closing. BNP Paribas’ M&A and markets teams across Asia and Europe worked together to manage the risks associated with the deal falling through and thin liquidity in rupiah. In the end, the currency settlement occurred within 30 minutes of the crossing of shares.

“We’re leading the market in deal-contingent hedges in local markets … [thanks to] our local knowledge and ability to offer in big size,” said Nathalie Naffi, the bank’s head of FX, local markets and commodities structuring for EMEA.

Elsewhere, BNP Paribas’ focus on ESG has extended to its FX business, with the bank executing the first sustainable FX forward – for Siemens Gamesa to hedge a €174m exposure to Taiwan dollars from selling offshore wind turbines in the country. If the renewable energy company fails to meet sustainability targets, there will be a step-up in the strike of the non-deliverable forward, with that additional premium to be invested in a reforestation project.

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