Americas Interest Rate Derivatives House of the Year: BNP Paribas
For showing commitment to clients during bad times as well as good, for leadership in preparing for the transition to Sofr and for continued innovation in structured solutions, BNP Paribas is our Americas Interest Rate Derivatives House of the Year.
BNP Paribas’s growth of its interest rates derivatives business has been a story of steady and consistent progress since it began with the hire of Morgan Stanley and Bank of America alumnus David Moore to lead the G10 Americas rates business four years ago, and in 2019 it showed that it has become a key player in the market. It has raised market share in G10 rates, in options and in structured products and is now the leading non‑US or quasi-US rates derivatives house, while it has also been a leader in the critically important transition to Sofr.
How did it get there? A mix of organic and external growth that built on its traditional strengths in Europe and in derivatives, say executives, as well as a measured growth plan that underscores its long-term commitment to the US market.
The bank has been improving its league table standings year-on-year since the build-out started. In structured rates, which includes vanilla options, inflation and other structured deals, it improved from 12th in 2017 to eighth in 2018 and fifth in 2019, a year in which it was the only desk in the top seven to record a rise in revenues.
The bank has made great strides in its US Treasuries business, more than tripling market share in e-trading from 1.5% two years ago to 5.2% at the end of 2019. That growth has been accomplished through two main channels. First, it is making full use of a 2017 collaboration agreement with GTS, an electronic trading firm and market maker that has a leading business in equities, to deliver fast execution in the US Treasuries market.
“We have been making sure that we are relevant for the very demanding accounts that require enhanced execution,” says Stephane Pellerin, head of flow rates trading, Americas.
It’s also pushing hard to build market share among more traditional clients by making sure that it makes its balance sheet available in bad times for liquidity, as well as good. So while some dealers typically contract balance sheet at the end of the month or quarter and can’t deliver for clients, BNP Paribas remains committed.
“We have made a point to be there for clients, even through market dislocations,” Pellerin says. “Of course, one very unusual bad time was the Covid crisis. Then we were able to demonstrate to our clients that, even though we too were challenged, we were there for them.”
Actions like that aren’t quickly forgotten, leading some of the largest US asset managers to bring BNP Paribas into their core circle of primary providers. “They were really appreciative of the way we stood up for them during that time,” Pellerin says. “Banks and overseas official institutions also had similar needs, so there too we deployed the resources available to us.”
The development of the Sofr market was central to the BNP Paribas push in interest rate derivatives in 2019 and moving towards the October 2020 ‘big bang’, when clearing houses will shift to the new reference rate for discounting swaps.
The scale of its engagement with clients on the issue has been exceptional, with executives involved in regular one-on-one meetings, while events such as symposiums and conference calls have been attended by more than 1,200 clients.
“Sofr is a paradigm shift in terms of how the market functions and we thought this was critical for the client base to understand and to make sure they are proactive in learning about it, in setting up their internal governance, in assessing the risk they have and in developing their own plan for transition,” says Alex Maia, head of interest rate structuring and solutions, Americas.
Meanwhile, it has been at the forefront of the swaps market, where it has executed more than $100bn in notional of Sofr swaps since inception, giving it an implied market share well into the double-digits. It was one of the first dealers to clear Sofr swaps at LCH and CME back in late 2018, it was the first dealer to stream prices on Tradeweb and Bloomberg, and it issued its first Sofr certificate of deposit in the primary market in December 2019.
“We made it a point to stream prices, so that whether or not a client wants to get a voice price or trade electronically, they can have real-time streaming available for their own simulations or their portfolio impact assessments,” says Pellerin.
“But to push prices you need to be able at all times to provide reliable, marketable prices — and for that you really have to be in the market.”
It beefed up its short-term interest rate trading desk, including sharing resources with the firm’s repo trading desk. “Sofr is at the intersection of the derivatives market and the repo market,” he says. “These additional resources make us comfortable providing real-time streaming and pricing large transactions. We talk to a very wide range of clients representing the whole of the Sofr market as it is today, which means we can recycle risk effectively and provide tighter bid-offers.”
The market for non-linear Sofr products is yet to take off, but BNP Paribas put in the groundwork during 2019 and early 2020. “The lack of liquidity now in Sofr swaptions is largely driven by the lack of liquidity in Sofr swaps,” says Alvin Loshak, head of non-linear rates trading.
The big banks at the clearing houses in October this year should dramatically increase liquidity, he says, with market-making in Sofr options following before the end of the year. “We have made the investments, we have the infrastructure and we are just waiting for the market to be ready,” says Loshak. “A year from now, the Sofr swaption market will be larger than the existing Libor market.”
The structured solutions business enjoyed an exceptionally strong 2019, with growth particularly strong in products linked to synthetic funding such as index trades, total return swaps and bond forwards. It has also taken a lead in the committed repo product, clocking up deals worth several billion dollars.
“Access to the repo market for infrequent users is not a given, because of banks’ balance sheet constraints,” says Maia.
In a committed repo, the clients get commitment to enter a repo trade at predetermined haircuts, predetermined funding spreads and with an eligible collateral pool.
It means that those clients worried that if they faced a short-term cash requirement — a margin call, for example — they would have to sell a portfolio, with all the transaction costs and market risks that involves, can instead be sure of being able to use the repo to get cash. It’s akin to an option on a repo.
Business is booming — $1bn trades are becoming common — both in this type of plain vanilla deal and in more bespoke solutions for clients.
“We can identify exactly what the client needs and then create the committed facility to match it exactly,” says Maia.
In some deals, the bank has made the commitment contingent on the level of interest rates, and it has trades in the pipeline that have dual contingencies embedded. “We are currently looking at trades that are linked to the level of more than one asset class as we continue to evolve and refine the product capability for very specific needs that clients have,” Maia says.
The build-out on the non-linear side has seen BNP Paribas getting involved in the kinds of transactions that it wouldn’t previously have looked at, says Loshak. “Deal-contingents are a great example of a product that a couple of years ago I don’t think we would ever have done in the US, but now I look at potential trades at least once a week, and we are transacting on a regular basis.”
Deal-contingent swaps have developed over the past few years as a product used by corporates and private equity firms in mergers and acquisitions, allowing the acquirer to hedge the funding without having to worry about unwinding the swap if the deal falls through.
The firm has been active in deal-contingents in many jurisdictions, says Maia, doing dollar interest rate hedges in several continents.