Derivatives House: JP Morgan

IFR Awards 2022
9 min read
Christopher Whittall

Built to last
The twin shocks of Russia’s invasion of Ukraine and soaring inflation made 2022 the most challenging year for investors and companies since the financial crisis. For its consistent presence across asset classes while helping clients navigate these turbulent times, JP Morgan is IFR’s Derivatives House of the Year.

Derivatives House

Daniel Pinto likes to show his senior executives the same chart on regular occasions detailing where investment banks have ranked over the past few decades. Many have slid far from their former perches. Others no longer even exist.

The message from JP Morgan’s chief operating officer is clear: the US bank may have been number one for over 10 years now, but there’s no room for complacency.

“It’s humbling,” said Marc Badrichani, head of global sales and research. “We’re very proud and grateful to be number one, but saying you want to be number one isn’t a strategy. The biggest challenge for a large organisation like ours is balancing continuity that plays to our strengths with the market reality that is changing.”

There’s no doubt that 2022 was a year of change for financial markets – and one where JP Morgan proved yet again why it remains top of the pile in sales and trading. As asset prices whipsawed following Russia’s invasion of Ukraine and a surge in global inflation, JP Morgan’s unfailing presence across products and regions provided its clients with a reassuring measure of calm in uncertain times.

The US bank, steeped in the history of derivatives markets, was able to offer its expertise and balance sheet time and again, helping companies and investors weather the storm. And in a year where banks’ underwriting arms suffered as public funding markets clammed up, JP Morgan’s trading unit acted as a valuable counterweight. The US bank raked in US$29bn in 2022 markets revenue, just shy of its record haul registered two years earlier.

“We have a set-up that enables us to do well in these environments,” said Badrichani. “The derivatives culture is at the core of JP Morgan. Where other banks may have exited some businesses over the years, we took the view that you need to be complete to do well with your clients. You can’t tell your clients you only want to do the very profitable business – you need to have all the products.”

Equities expansion

Fixed income drove banks’ trading revenues higher in 2022 as macro themes came to dominate markets. But you could just as easily argue it was the performance of JP Morgan’s equities division (and equity derivatives in particular) that stood out in a year when global stock markets plunged 20%.

JP Morgan generated record equity derivatives revenues for the second year in a row, despite contending with a far more challenging market backdrop. The bank’s strategic push across the broader equities business has now seen it grow revenues by 60% since 2019 to put it within touching distance of longstanding rivals Morgan Stanley and Goldman Sachs.

“We believe we’re more complete now than we’ve ever been,” said Scott Mitchell, co-head of global equity derivatives sales. “We’re in every market with a leading offering across both flow and structured, which is something we probably couldn’t say as confidently five years ago as we do now.”

Targeted investments in technology and talent have fuelled a significant expansion in flow trading in recent years, particularly in the choppy markets around the start of the pandemic. But JP Morgan also ploughed resources into historical areas of strength such as structured and corporate derivatives, while innovating in growth activities like quantitative investment strategies.

The results are striking, with the bank’s share of the external institutional client wallet for equity derivative products increasing from 11.6% in 2020 to 13.9% in the first half of 2022, according to analytics firm Coalition Greenwich.

“It has been a multi-year journey and the bedrock of all of this has been innovation,” said Rui Fernandes, global head of equities and credit structuring.

Fernandes highlighted an initiative in structured products the bank started in Asia a few years ago called “price more, trade more”. That culminated in JP Morgan processing a staggering 19 million requests for quotes on structured products last year.

“We want to be able to price as many products as possible for clients in whatever channel they want to use,” Fernandes said.

JP Morgan has also consolidated its position as one of the leading firms in corporate derivatives in a year where the sharp drop-off in equity capital market deals forced clients to search for alternative ways to monetise their stakes in companies.

Francesco Lavatelli, global head of corporate equity derivatives marketing, said the creation of a dedicated sales team across both corporate and private clients in 2019 made cross-border transactions easier to execute and helped the business grow in different market environments.

“It's a diversified business that allows us to rotate across jurisdictions, clients and products to always run at a very high rate,” Lavatelli said.

Macro booms

JP Morgan’s extensive presence across fixed-income markets made it ideally placed to help clients negotiate the myriad risks that arose in 2022. Wild market swings needed managing, a tangle of international sanctions against Russia needed unpicking, and derivatives users facing eye-watering margin calls needed financing.

The bank’s volumes in US dollar and euro interest rate swaps more than doubled last year as clients shuffled positions in response to the US Federal Reserve raising interest rates at the fastest pace since the early 1980s. In currencies and emerging markets, JP Morgan’s client derivative activity rose more than 20%, including a material uptick in FX option volumes. In credit markets, meanwhile, an explosion in macro trading played to one of the firm’s traditional strengths as investors turned to broad-based credit default swap indices to hedge positions.

“If you do well over the cycle with clients, they know where to go when markets get bumpy and they need liquidity,” said Badrichani. “Clients know they will always get a price from JP Morgan – that is how it works.”

Like in equities, investments in technology have been instrumental in helping the bank connect with clients through a variety of channels. Thirty percent of JP Morgan’s developed market interest rate swap volumes are now electronically executed, while close to 80% of its on-the-run CDS index volume is done through electronic RFQs.

Clients, for their part, sound happier than ever with the service. “2022 was such a unique year and it’s in times like these, when volatility is high and liquidity is poor, that having a counterparty like JP Morgan becomes invaluable,” said a senior executive at one of the world's largest asset managers.

“They really are best in class in terms of speed and ability to price everything we’re looking to trade across all asset classes. It's during these periods that… firms like JP Morgan rise to the top.”

Commodities strength

JP Morgan’s commodities business also proved its mettle in a period where natural resource prices were extremely volatile. The US bank retained its number one ranking in commodities with institutional clients, according to Coalition Greenwich, and it was heavily involved with corporate clients too.

That included taking a prominent role in arranging financing for Chinese businessman Xiang Guangda’s Tsingshan Holding Group after the world’s largest nickel producer found itself on the wrong side of an extraordinary short squeeze in nickel prices last year.

Badrichani declined to comment on individual clients. But, speaking more generally, he underlined the importance of “understanding the legal complexities, the risks and the stresses clients are under, as well as having the balance sheet to deploy”.

JP Morgan’s legal expertise was invaluable once more when deciphering the complex web of sanctions levied against Russia for its invasion of Ukraine, making it one of only a handful of banks able to help clients de-risk in these fast-moving markets.

“Don’t underestimate the value of having a strong legal department when working through difficult market situations,” Badrichani said.

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