In August, a we-hedge funds saw an opportunity to trade the credit risk differential between European countries and we financial institutions. The fund gave the order to a single bank, which worked on the billion-dollar transaction over a three-week period, offsetting the risk with the hedging needs of various market valuation adjustment offices. bank credit.
This bank was BNP Paribas, and it is exactly the type of transaction that the French concessionaire hopes will become the norm as it aspires to become the leading European player in the we.
After high volatility in 2020, triggered by the spread of the Covid-19 pandemic, credit markets have calmed down in 2021. Volatility on large we and European indices remained relatively unchanged throughout the year. Trading moved from index credit default swaps (CDS), which had been central to the early stages of the pandemic, to a resurgence in single-name swap exchanges.
The change meant that credit bureaus had to do more than just provide liquidity. They had to be proactive with customers, devising unique business ideas to pick up some of the business that had held up through the most volatile times.
“Last year we needed to be much closer to customers and able to find both sides of the risk as market conditions changed dramatically from 2020,” says Nick Stratopoulos, managing director of credit sales for BNP Paribas in New York.
Relative value transactions, such as wethe decision of hedge funds based on the sale of protection on we institutional investors and buying protection on the European subordinated financial index, has become a defining feature of BNP The year of Paribas. The bank has boasted of a 60% annual increase in relative value transactions stemming from its research insights.
The bank relied on its research team to help clients find opportunities. The continued impact of the pandemic on markets, including work-from-home trends, economic reopening and the re-emergence of Mergers & Acquisitions activity, all offered many relative value opportunities. Research on these topics has proven popular with clients.
“Our relative value strategy deals have attracted an audience with a growing group of clients who sometimes execute up to 100% of these deals,” says Viktor Hjort, global head of credit strategy and desk analysts at BNP Paribas.
Hjort cites opportunities in the summer when the difference between a bond’s credit spread and the comparable’s spread CDS – known as link-CDS base – offered attractive returns for clients holding both CDS and the cash deposit.
In Europe, the bank estimates that it has traded 14% of single-signature securities CDS volume in 2021. According to electronic trading figures from Bloomberg, the French dealer was responsible for 13.5% of the volume of the Europe iTraxx index in 2021.
Although this is not a unique arrangement for BNP Paribas, the bank attributes its strong year in part to the integration of front-office functions, where merchants are increasingly taking on sales roles and researchers share a similar mindset.
Our relative value strategy trades have attracted an audience with a growing group of clients who sometimes execute up to 100% of these trades
Victor Hjort, BNP Paribas
“The traditional disciplines of sales, trading and research have merged more than ever before, and this is especially the case in a low volatility year,” says Peter Rafferty, BNP Responsible for trading and sales of credit streams of Paribas for Europe, Middle East and Africa. “The commercial nature of sellers and research is much more important than it has ever been.”
A series of new hires in Europe helped strengthen the bank’s position in its home region. On the cash side, Nabil Benjelloun joined in January 2021 from HSBC to take on the role of Head of Investment Grade Debt Trading. Alun Sheppard came on board in July, leaving JP Morgan will take on the role of Head of Credit and High Yield Loans trading and trades cash and CDS at the French bank.
More recently in the wethe bank recruited Patrick Vickers from Credit Suisse as a senior CDS trader focusing on distressed trading. It relates to BNP director of Paribas we single name CDS trade Matt Mandell. Karan Puri joined Barclays earlier this year to bolster the bank’s index trading.
In the we, the bank rose to second place in Bloomberg’s electronic trading rankings for index trading. It also posted an estimated 15% market share in we unique names.
“We are well above our weight in terms of secondary market share and business performance,” says Stratopoulos.
The credit options market is an example of the bank’s success. Market share figures are hard to come by, however. BNP Paribas claims that its we index option trading totaled €634 billion ($725 billion) notional in 2021. This is down from 2020, when volatility spurred an increase in market activity, but about a third more than the $538 billion worth of index options the bank traded in the we in 2019.
Stratopoulos says there were various situations throughout the year where asset managers sold call options on their high-yield equity portfolios, which BNP Paribas has partnered with hedge fund clients seeking leveraged exposure.
“Two years ago, we might not have been able to find both sides of these risks in the weexplains Stratopoulos. “Now, with the development of our high yield business and increased customer penetration, we have found more trades to strengthen what was already one of the top three businesses and take it all the way to the top.”
We have far exceeded our weight in terms of secondary market share and commercial performance
Nick Stratopoulos, BNP Paribas
In its options business, a growing presence with large institutional clients trading non-linear credit products reflects the trajectory of the credit options market more generally.
“This business grew from a small group of hedge funds, maybe four or five, as more macro funds and specific credit funds got involved. But that space is now dominated by real money,” says Rafferty.
Instead of trading positions, so-called real-money investors such as pension funds and insurers are more likely to hold long-term positions. They also trade large sizes, which makes these clients particularly valuable to the office. As these market players have become more sophisticated and expanded their credit portfolios, BNP Paribas has seen them increasingly constitute the activity of the credit bureau.
The broader credit derivatives market has seen a similar transition, where the historical bias in favor of hedge funds has given way to a more balanced mix of market participants.
“A hedge fund will generally have a more tactical approach and, at the opposite extreme, the life insurance and pension fund communities manage their liabilities for the long term. But, in terms of the instruments used to achieve those , they are becoming more and more similar,” says Hjort.
On the structured side, the bank has seen a similar shift in market dynamics and customer priorities. With spreads tightening and dislocations becoming less evident than in the early months of the pandemic, clients had to look elsewhere for returns. Insurance companies, for example, have turned to repackaged notes, which combine bonds and derivatives.
“2020 has been a lot about seizing opportunities in the markets and trying to take advantage of dislocations. Last year, the fact that volatility and spreads were low meant that people had to start thinking again about bespoke and more structured types of trades to beat investment objectives or to hedge,” says Paul- Louis Laferrere, a credit structurer in London.
BNP Paribas has also seen increased activity from small institutional clients interested in equity tranches of collateralized synthetic bonds (CSOss), which break single-name wallets CDS into risk tranches, due to their attractive risk and reward profile.
The bank estimates that it traded 40% of the global market CSOs volumes over the past year, including primary issues and what turned out to be an active year for secondary market transactions.
“A good portion of our volume was in the secondary market, providing liquidity on bespoke tranches initially traded with other dealers,” says Laferrere.
The bank is also working to make credit derivatives available to customers without the necessary legal agreements or lines of credit in place. Through managed credit derivative certificates, the bank offers negotiable securities to small clients to express credit opinions, with margin requirements that negate credit risk for the bank.
“The idea, given our ambitions, is that this becomes more systematically integrated into our offer to customers. We are already seeing the results in terms of customer interactions, so we expect that to grow,” says Laferrere.