BNP Paribas has always been a force to be reckoned with for structured products in Europe, and more recently in Asia. Now the French powerhouse has successfully exported its expertise to the Americas. Each area of its platform - flow derivatives, fund derivatives, equity finance, structured products and strategic equity - has during the past year passed critical milestones that have driven the growth of the business, and the results speak for themselves.
The BNP Paribas North America Corporate and Investment Banking Division posted a 46% rise in revenues in 2006, of which a significant part can be attributed to the growth in derivatives in the Americas. In fact, its North American equities and derivatives business saw a 124% increase in revenues for 2006 compared with 2005. The bank's headcount has grown in tandem and increased by 25% in 2006, meaning that there are now some 150 US-based professionals working in the equity derivatives arena.
"We believe that our biggest strength at BNP Paribas is the ability to combine our expertise in a mature European market with an American perspective," says Todd Steinberg, BNP's New York-based head of equities and derivatives Americas.
The success of the business line has without doubt been helped by the symbiosis between the bank's flow business and its structured products range, market participants tell Structured Products. "Our large structured products positions have enabled us to offset some of our exotic trading risks with hedge funds, thanks to a real competitive edge in pricing complex flow products," Steinberg says. Famously, BNP was among the first to develop structured products linked to assets previously traded only by hedge funds.
One idea that has enjoyed considerable client uptake in the US involved dispersion, that is, the divergence between the returns on a basket of stocks and an average basket return. "Our Global Custom Dispersion Basket adds a new dimension to a standard single stock versus regional index dispersion trade," Steinberg explains. "The innovation provides a more efficient, less costly and more tailored access to global dispersion whereby investors can take a specific view on dispersion on a custom global basket, offering investment flexibility. The basket also trades at a better level than equivalent multiple dispersion trades on individual regions, meaning it is higher when the volatility of the stocks increases and the correlation between the stocks falls, but is not dependent on the direction of stock movement. Dispersion trades give clients absolute returns because the payout is unaffected by equity market performance." One client, Miao Dan Wu of hedge fund SAC Capital, refers to BNP as "the 'go to' dealer on dispersion trading", and adds that the bank's "custom analysis ... coupled with aggressive pricing convinced us to embark on a new strategy."
Other innovations by the team (too numerous to mention in full here) include the Titanium range, which imports the European concept of money-market-plus funds. "In view of the lack of structured money-market-plus products in the Americas, BNP created a three-year money market product dubbed Titanium," Steinberg says. "Demand proved to be high, as clients were hungry for a short-tenor product with a stable and money market-like return."
The S&P Titanium Custom Index is a US dollar-denominated index of enhanced money market funds, calculated on a total return basis and designed to outperform federal funds by 3% with low volatility. The index replicates the performance of six absolute return strategies: credit, interest rate, systematic arbitrage, equity, FX, and classic money market funds. "We recently sold an alpha product on Titanium to a US-based asset management firm offering 200% exposure to the outperformance of the Titanium index over cash. The client was impressed by the historical performance, and believed it would fit well into his portfolio, providing a high probability of generating a healthy spread over federal funds with low volatility."
WHY BNP PARIBAS WON
BNP Paribas is a major force in the North American structured products markets. A range of innovative financial engineering solutions makes it the preferred dealer of countless organisations from hedge funds to wholesale distributors.
The week on Risk.net, March 10-16 2018Receive this by email