Playing to its strengths as a top trading house across both flow market making and structured products, Nomura stands out for its consistency, global offering and appetite for risk taking.
Two sharp spikes in volatility have characterised the past 12 months: the US interest rate rally in summer 2019 and the Covid-19 pandemic, which reached its peak in March 2020. Both provided Nomura with an opportunity to support its clients and demonstrate its market making credentials.
In an era when many banks look to pass through risk without holding any, Nomura stands out for its market making abilities and willingness to warehouse risk. “Capital is finite and banks allocate it to businesses that are focus areas,” says Tony Morris, global head of quantitative strategies at Nomura in London. “This is an area of focus for us, but perhaps less so for others.
“We source risk from a client where there is no exact matching buyer for it. That means we will take on a position and then decompose the risk into pieces for which there are buyers. It’s crucial to know your clients and know what they want.”
The twin volatility spikes of the past 12 months underlined why Nomura has been a top structured rates house globally for the past five years. Its global approach to its dollar business ensures seamless liquidity and means it can spot opportunities and live up to its tagline of connecting markets east and west.
Nowhere was this more evident than during the coronavirus crisis, when Nomura’s experience in its home market of Japan informed its thinking. “Few US dealers thought rates could go negative, whereas we were comfortable with that,” says Hans-Peter Schoech, head of structured rates trading.
The bank was well positioned from the summer of 2019, when the US rates crisis was triggered by hedge funds betting the Fed’s rate tightening early in the year would cause the economy to stall and ultimately prompt a policy U-turn from the central bank. “Some hedge funds predicted this scenario and during the first half of 2019 put on very large positions in terms of buying low strike receivers on short dated, one and two year tails,” Schoech explains. “When this started playing out, the market started receiving more and more and dealers fell into all sorts of problems in terms of short gamma/short vanna, which caused problems to dealers.”
While some dealers shut up shop, Nomura remained in the flow, market making for its clients, and was ready when Covid-19 hit. “What struck us from being in the European and Japanese markets was that we saw that rates in the US could get really low or even negative and that was something large parts of the US market just did not believe could happen,” says Schoech.
That meant US market participants were relaxed about selling receivers with low strikes and in particular zero strike receivers and floors, or even with negative strikes, and Nomura found buyers. “On the other side we were able to find a vast number of European or Asian clients that took other views,” says Schoech.
Connectivity is also a watchword within the firm. “We don’t have our sales function as a gatekeeper to the client,” says Tina Rydberg, head of QIS sales for EMEA and head of Nordic sales, global markets. “[The sales force] is an instrument of connectivity to give clients access to traders, strategy and structuring. Solutions are created with the collaboration of the trading desk and desk strategies, rather than by a remote research function. That means we can create ideas that we know clients want.”
The bank is strong both on the flow market making side but also on the structured side, capturing some of the more complex flows and underlining its geographic reach. “BTPi [inflation-linked Italian government bonds] repacks have always been a popular product in Europe but we managed to sell that into Japan on the back of a general dearth of yield there and risk appetite for European names in particular,” says Schoech.
On the insurance solutions side, it helped a client minimise accounting volatility using cross-currency swaps. “The whole reason this flow worked was that the client needed to buy some embedded options in the product and we were able to hedge them through our structured franchise,” Schoech adds.