Staying the course
Competition among bank trading desks remained as fierce as ever in 2021 following a bumper 2020. For its steadfast commitment to growing its presence in global markets come rain or shine, BNP Paribas is IFR’s Derivatives House and Interest Rate Derivatives House of the Year.
BNP Paribas’s quest to become Europe’s pre-eminent bank in global markets met with a brutal reality check when the global pandemic struck in early 2020. Even as its fixed-income and currency traders flourished, BNPP nursed sizeable losses in structured equity derivatives – one of the crown jewels in its trading unit – when stock markets plunged.
Far from following other European rivals in retreat, though, BNPP doubled down on its expansion plans over the next 18 months with large-scale acquisitions, senior hires and by continuing to invest heavily in technology. Its unwavering commitment to sales and trading paid off in 2021, reaffirming the pedigree of one of the few remaining global investment banks with a comprehensive derivatives offering across asset classes and regions.
BNPP was the third fastest-growing major bank in global markets between mid-2019 and mid-2021 in terms of market share gains, according to analytics firm Coalition Greenwich. BNPP’s global markets revenues rose to €5.5bn in the first three quarters of 2021, a 30% increase from the same period in 2019, making it the largest Continental European bank with a full-service offering across fixed income and equities trading.
“We are not doing stop and go. We have a strategy and we deliver it. Sometimes there are bumps along the road; we accept them as long as the strategy is not challenged,” said Olivier Osty, head of global markets. “The way to mitigate [the structured equity losses] was not to stop this business, but increase [flow trading] to have a business that would be reacting more positively to very volatile markets.”
Along with acquisitions, Osty highlighted the material budget BNPP has dedicated to technology over the past few years as playing a pivotal role in engaging more with clients. “It explains why we are growing the business; it explains why we are getting significant market share in all derivatives asset classes,” he said.
BNPP’s expansion in interest rate derivatives over the past few years has epitomised its commitment to growing the broader markets business, drawing a stark contrast with the many European banks that have stepped back over the previous decade in the face of high capital charges and lacklustre returns.
The heft of BNPP’s fixed-income unit in general – and its macro trading business in particular – proved an invaluable counterweight during the market turmoil of 2020, allowing the bank to weather the equities losses while also providing vital services for corporate and institutional clients. BNPP’s rates derivatives desks continued to make inroads in 2021, thanks in no small part to its sizeable investments in electronic trading.
“We’re a global rates business,” said Joe Squires, global head of G-10 rate sales and co-head of G-10 rates for EMEA. “We find increasingly that being a full-scale business … is imperative to being able to service our clients.”
BNPP held a top two dealer position in euro swaps with clients on electronic trading platforms as of late 2021, the bank said, from number five or six in 2019. It broke into the top 10 for US dollar swaps after a concerted push in that market and was top five in swaps linked to the secured overnight financing rate.
BNPP has also been active in buying up swaps books of dealers looking to scale back, providing an upfront revenue boost and – more importantly – an opening to engage with new clients on future trades.
“We are a growth bank and of course that’s very much been the case in G-10 rates,” said Squires. “While banks have pulled away from markets … we see this as an opportunity to gain a foothold” and to “accelerate our gains”, he said.
Clients ranging from New York-based hedge funds to UK corporates confirm that BNPP has made remarkable progress in recent years. “BNP Paribas has grown from doing no business with us in 2017 to being a significant swap counterparty,” said Shaun Kennedy, group treasurer at Associated British Ports. “They’re very competitive on pricing and we’ve been impressed with their structuring capabilities too.”
BNPP’s equities division rebounded strongly in 2021 after some inevitable soul-searching the previous year. The bank was on track to record its best equities trading revenues in at least a decade as of the third quarter, including what was set to be its best ever period in structured products – a remarkable turnaround after the losses at the start of the pandemic.
But it was the continued development of its flow trading and financing businesses that really showed the ambitious diversification and growth strategy BNPP is pursuing in these markets. That started in earnest in 2019 with the announcement that it would buy Deutsche Bank’s prime brokerage unit and stepped up a gear in 2021 with the acquisition of the remaining 50% stake in cash equities specialist Exane.
In a further coup, BNPP struck a referral agreement to encourage Credit Suisse’s prime brokerage clients to transfer to BNPP after the Swiss bank said it would shutter this business following huge losses from the collapse of Archegos Capital Management (which BNPP avoided). These landmark deals – along with a number of key hires – all fostered a clear aim: bringing greater balance to an equities unit that had previously relied too heavily on structured derivatives.
“The combination of three businesses – cash, prime and derivatives – that are very good already … can be very powerful,” said Nicolas Marque, global head of equity derivatives.
“We managed not only to bounce back but also to really be able to roll out very efficient strategies: to defend on the structured products, which were under pressure [in 2020] and … keep our leadership, and at the same time to start growing our flow ambition.”
Retaining its commitment to the structured notes business – albeit with an increased focus on risk management – proved invaluable, as rising equity markets created huge demand from clients for these products. After issuing €32bn in 2020, BNPP was on track to print €40bn in structured notes in 2021 as of late last year, according to Renaud Meary, head of structured equity.
BNPP’s expansion in flow credit derivatives trading, with a notable push in US markets, further underlined its determination to stand toe-to-toe with the largest global investment banks. BNPP said it was ranked number two in iTraxx index trading volumes on Bloomberg in Europe and number three in CDX indices in the US as of late last year.
“The US expansion is critical,” said Peter Rafferty, head of flow credit trading and sales for EMEA. “Although seen as a European bank, [we have] a global reach … in terms of the credit derivative offering.”
On the structured side of the business, BNPP bolstered its already prominent position in bespoke collateralised synthetic obligations, where investors buy tranches of corporate credit-default swap portfolios offering varying degrees of risk and return. The bank said it closed four full-capital structure deals in primary markets in 2021, while also remaining a top liquidity provider for CSOs in secondary markets.
“Given the low spread and low vol environment, we’re having more and more clients that are open to discussing some slightly more structured topics as a way to … generate yield,” said credit structuring specialist Paul-Louis Laferrere.
BNPP’s continued investments in technology also bore fruit in foreign exchange derivatives, where a decline in market volatility provided a challenging backdrop for the wider industry.
“The electronification of our derivative businesses on the swaps and options we’ve really taken … to a different level over the course of this year in order to be competitive, to be able to gain market share, to do more volumes more efficiently and effectively to tighten bid-offer spreads,” said Neehal Shah, global head of G-10 FX trading.
The bank’s focus on expanding electronically in emerging market FX swaps yielded particularly impressive results. By the second quarter of 2021, electronic local market volumes had surged 126% in CEEMEA, 219% in Asia and 187% in Latin America compared with the first quarter of 2020.
Elsewhere, BNPP’s expertise in offering bespoke solutions for complex hedging problems helped clients navigate the uncertain economic environment as the global pandemic lingered.
The low volatility environment “pushes us to innovate in order to differentiate ourselves", said Nathalie Naffi, head of FX, local markets and commodity derivatives structuring.
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