Equity Derivatives House: BNP Paribas

For equity derivatives businesses with a structured products bias, 2016 was a year of reassessment as demand for new paper dried up and the emphasis shifted to diversification. For beefing up its institutional flow operations, building US market share and putting sustainability at the core of its strategy, BNP Paribas is IFR’s Equity Derivatives House of the Year.

Equity derivative businesses went into 2016 with a mountain to climb as a turbulent start put the previous year’s record structured products revenues out of reach. For BNP Paribas – a bank that spent recent years integrating sizeable structured products acquisitions – the focus shifted towards a more balanced model to promote stable returns.

A diversification effort had been under way since early 2015, when equities, commodities and fixed income were consolidated into a global markets unit. In equity derivatives, the bank removed product lines and combined flow and structured operations to address complex client needs through a full range of solutions stretching from low-touch delta one flow activities, to highly bespoke quantitative investment strategies, with an unparalleled commitment to sustainable investment themes.

“It has been a challenging year for underlying activity, but all of our efforts are paying off and the franchise is more diversified,” said Nicolas Marque, head of equity derivatives at BNPP. “We’re now much stronger in flow and we’ve seen big growth in the algo business. The consistency of our strategy is going up.”

Distribution revenues were down 25% – in line with market trends – but the bank offset some of those reductions with improved institutional flow and big corporate gains.

“This year, we moved away from a macro agenda to one where there’s little or no conviction at all. So the fact that our institutional business is up versus last year is quite exceptional,” said Emmanuel Dray, head of institutional sales at BNPP. “On our key initiatives we delivered, but there’s still tremendous room for improvement.”

A three-pillared flow investment strategy encompassing capital commitment, tailored content and robust market-making infrastructure bore fruit. The bank printed some of the year’s trophy trades, including the largest dispersion swap to-date, for US$20m vega notional, traded with a US asset manager.

Highlighting improved traction with US clients, the bank traded US$400m of delta one custom baskets on the share buyback theme.

“Our market share with US asset managers more than doubled and it makes a big difference as just 10bp of US market share is a game-changer,” said Marque. “Today, we’re making more money from the corporate derivatives business in the US than in France. For a bank like BNP Paribas that’s a big change.”

In listed markets, the bank retained a leading position across EuroStoxx 50 products, including dividend futures, and ranked number one for the CME’s new S&P 500 dividend futures by mid-year. BNPP worked closely with Eurex in designing a listed version of equity total return swaps, which enable investors to trade implied equity repo without incurring uncleared swaps margin.

The bank addressed its own collateral requirements and optimised inventory by printing more than US$10bn in full flex collateral trades. The trades see clients receive a mixed pool of assets including equities, convertible bonds, ETFs and structured notes – according to the bank’s needs – in return for yield enhancement.

In its Theam fund business, BNPP collected almost €500m in the Equity Europe Income Defensive quant strategy, offering insurers capital-efficient investments from a Solvency II perspective. New clients brought on to the insurance platform included Nippon Life, one of Japan’s largest insurers, as part of an expansion of the variable annuity business.

With a strategy geared towards sustainability, BNPP cemented its position as a leader in environmental, social and governance themes. In November 2015, the bank partnered with 12 French institutional investors to launch Tera Neva, a sustainable investment platform supporting bespoke products that combine financial performance with impact investing.

“Sustainability isn’t just part of our product range, it’s something we put at the top of our entire product range,” said Marque. “The sustainability theme was once perceived as a nice thing to have if you were prepared to sacrifice performance. But now it’s compulsory and our products show that the thematic actually performs better than the market.”

In April, the bank teamed up with FTSE Russell to offer “green transition” indices that tilt exposure to companies shifting towards greener revenue mixes. In October, the bank partnered with Solactive to offer swaps and structured products on a benchmark that offers exposure to companies that reflect the United Nations’ sustainable development goals, which aim to end poverty, tackle climate change and promote equality.