Bucking the trend
Declines in volatility and trading volumes caused a slowdown at most banks’ markets divisions in 2023 following a bumper prior year. For growing its market share through sustained investments across regions, products and clients, Bank of America is IFR’s Derivatives House and Foreign Exchange Derivatives House of the Year.
Most banks’ markets divisions faced a comedown in 2023 after the trading-induced sugar high of the previous year. Volatility fell. Client activity slowed. And, unsurprisingly, trading revenues at the largest dealers duly dropped from 2022’s heady levels.
Bank of America proved to be the exception.
Reaping the rewards of consistent investment in sales and trading, BofA bucked the downward trend among its rivals to register a 9% rise in markets revenues in the first nine months of 2023 to US$13.9bn. In the process it closed the gap to the other big four US banks – and drew further away from a clutch of resurgent European rivals.
BofA has made significant advances in areas where it once lagged. That includes expanding materially in macro trading, beefing up its international operations and increasing its reach with both institutional and corporate clients. Jim DeMare, president of global markets, said BofA began ramping up investments in 2021 after concluding it had lost some “meaningful” market share compared to the years running up to the outbreak of the pandemic in 2020.
Part of the problem was BofA hadn’t been keeping pace with the rapid growth in financial markets and so, by extension, its clients. The S&P 500 had nearly doubled in value over the previous few years and the amount of bonds outstanding had ballooned, but BofA had only been increasing financial resources in global markets by 4% a year from 2016 to 2020 as measured by average assets.
“We didn’t grow … even close to what the markets had been growing,” said DeMare. “So, by definition, we couldn't maintain our competitiveness in the marketplace and we couldn't deliver to clients, whether it’s liquidity through intermediation and market-making or in financing.”
The other challenge was changing the culture of a business that had grown accustomed to losing ground to rivals. “We needed to increase our intensity,” said DeMare. “Then, step by step, [it’s been about] identifying places where our clients need us [and] allocating financial resources and people accordingly.”
There hasn’t been a shortage of resources to deploy. BofA has increased its average assets in global markets by about 35% in recent years to US$864bn at the end of the third quarter of 2023 and its risk-weighted assets by 16%. And they’re having a notable impact. BofA chief executive Brian Moynihan said in December global markets was probably on track for its best fourth quarter ever and signalled the bank plans to keep putting more capital into trading.
Macro headway
The expansion of BofA’s macro business has been integral to its success, serving both to grow and diversify its markets revenues. Macro trading accounted for 56% of fixed-income revenues in the first nine months of 2023, compared with 40% in 2019, following a widespread push across foreign exchange, rates and commodities.
FX derivatives provides an eye-catching example of the headway BofA has made. BofA’s FX options volumes were 54% higher in the first eight months of 2023 compared to the same period in 2020, comfortably outstripping the 9% volume growth across the wider market.
BofA merged its G10 FX and fixed-income emerging market businesses in 2020, consolidating all FX options activity in a single global trading desk. The new set-up helps the bank manage its risk more efficiently and offers better pricing for clients – a move that has paid off in the lower volatility environment of 2023.
“We have managed to survive this market very well and we continue to grow,” said Carlos Fernandez-Aller, head of global FX and EM macro trading. “The fact that we were fully integrated allowed us to use prices that are otherwise not present in other banks and allowed us to have a really strong competitive advantage.”
Broadening the business’s focus to all clients and regions resulted in BofA significantly increasing its footprint in emerging markets. Latin America now represents 15% of its FX options volumes, compared with 5% in 2020, while Asia now accounts for 21% from 15% three years before.
“In the past we were neglecting the emerging market part of the business. We completely changed that,” said Fernandez-Aller.
Another significant development is BofA strengthening its ties with institutional clients like hedge funds – a theme which underpins the bank’s expansion across its macro business. Doing more with institutional investors has improved BofA’s ability to recycle trading flows, helping to increase its risk capacity materially for corporate hedging transactions in the process.
“If you have clients that are only going in one direction, it’s not really a market,” said DeMare. “We need that offsetting risk. So institutional clients and corporate clients are just key.”
Rates strength
BofA demonstrated its strength in interest rates trading in another year when moves in these markets reverberated across asset classes. Many of BofA’s largest investments in rates trading in recent years have come in its European business. And while those have continued to bear fruit, in many ways it was the performance in its home market that set BofA apart in 2023.
When bond yields swung as the US regional banking crisis intensified in March, BofA sidestepped the heavy losses some firms sustained and was able to maintain a consistent presence to help clients.
“March was a very important inflection point for the market,” said Kavi Gupta, co-head of global rates trading. “From a market-making perspective it did offer some good opportunities and we did capitalise on those.”
Strong risk management has been a hallmark of BofA’s approach across the markets business this year. The bank not only reported its largest year-to-date markets revenue at the end of the third quarter in over a decade, but also did so without suffering a single day of trading losses. In rates markets, where volatility has been highest, Gupta said scenario-based analysis has been very important, given the tendency for government bond yields to move sharply in a short space of time.
“Our market share has always been strong. It’s really been around risk management and P&L retention where we’ve really improved,” Gupta said.
Commodities expansion
BofA’s ongoing investments in commodities continued to pay off in 2023 despite a drop in volatility from the previous year’s extremes. The bank said client activity had run in line with 2022, which is 90% above 2020’s "normalised" levels.
“It’s probably been one of the most active client years that we’ve had,” said George Cultraro, head of global commodities trading.
Tom Blair, global head of commodity sales, said the number of clients with whom BofA has traded has increased by about 15% to a record in 2023, with the bank continuing to make gains in areas including corporate risk management, sustainable finance, metals trading and quantitative investment strategies.
“We’ve gained share across all regions, all client types and all products,” said Blair. “To me, it is the validation of the strategy that we‘ve had.”
Equities outperformance
BofA also outperformed its peers in equities trading in 2023, despite revenues falling slightly from a high base in 2022. DeMare said BofA is earlier in its investment stages in equities compared to investments in other businesses they've made (ie fixed income). It has initially focused on growing in prime broking. But the bank has also been hiring more trading talent, including Nick Laux as international head of equities trading in London.
DeMare believes BofA has further to grow in the UK and Continental Europe in equity derivatives trading and structured notes. More broadly, he says BofA’s decision to establish a major trading hub in Paris following Brexit has been a “great decision”.
“Being on the ground in Paris is a big deal for us,” said DeMare. “Despite electronification and advances in technology … being with clients matters.”
To see the digital version of this report, please click here
To purchase printed copies or a PDF of this report, please email shahid.hamid@lseg.com in Asia Pacific & Middle East and leonie.welss@lseg.com for Europe & Americas.
