GLOBAL RISK MANAGEMENT — BANKS, PLATFORMS VIE FOR CONTROL
By Gordon Platt
Global Finance presents its annual awards highlighting the best global derivatives providers.
Four large commercial banks account for 93% of the total US banking industry’s notional amounts of derivatives contracts outstanding, according to the Office of the Comptroller of the Currency. The tight grip of the big banks on the market could ease significantly, however, under new regulations that require most swaps to be traded on electronic platforms.
The Dodd-Frank Act in the United States and new legislation in the European Union require most derivatives to be traded on exchanges and processed through clearinghouses. Amid the US government shutdown in October, swaps-market participants began trading standardized derivatives on a score of new swap execution facilities (SEFs).
“The creation of SEFs will transform OTC [over-the-counter] derivatives markets, resulting in economies of scale, reduced transaction risk, cost savings and growth in trading volumes and liquidity,” says Jeff Conway, executive vice president and head of State Street Global Exchange. State Street has filed with the CFTC to become a multi-asset SEF known as SwapEx. The platform will offer portfolio-compression capabilities to reduce the burden of higher margin requirements.
Deutsche Bank takes a much dimmer view of the new OTC derivatives regulation, which it says will reduce investment-banking income. “We expect the changes to drive second-tier players out of large parts of FICC [fixed income, currencies and commodities] sales and trading, leading to another round of concentration,” the bank stated in a recent report.
In addition to regulatory reforms and the entrance of new competitors, the banks are facing widening antitrust investigations. The US Department of Justice is looking into potential anti-competitive activity in credit-derivatives trading and clearing. The European Commission is investigating 13 financial groups for alleged collusion to stifle competition from exchanges in the credit-default swaps market between 2006 and 2009.
The Bank for International Settlements says global trading in over-the-counter interest rate derivatives averaged $2.3 trillion a day in April 2013, up from $2.1 trillion a day in the previous survey three years earlier. The growth reflected increased trading by financial institutions.
Amid the sweeping changes in the market, Global Finance has selected the World’s Best Derivatives Providers. The criteria used in selecting the winners included trading volume, market share, scope of global coverage, customer service, commitment to the business, pricing, technology and execution skills.
BEST INTEREST-RATE DERIVATIVES PROVIDER: CITI
Citi is a major participant in nearly every derivatives market, with strength in G10 rates, primarily swaps and swaptions (options to enter into swaps). Citi’s strategy is to be the global leader in central clearing across all major platforms, giving clients the choice of their preferred clearer. The bank offers a wide product range and geographic reach.
BEST CREDIT DERIVATIVES PROVIDER: GOLDMAN SACHS
Credit default swaps, which took some of the blame for causing the financial crisis, comprise 97% of the credit derivatives market in the US. Goldman Sachs is one of the biggest traders of credit derivatives. The firm keeps its exposure under control with offsetting positions in the market, while helping clients manage credit risks efficiently.
BEST EQUITY DERIVATIVES PROVIDER: BANK OF AMERICA MERRILL LYNCH
BofA Merrill is a member of 40 derivatives exchanges globally. The bank offers algorithms for trading US-listed options that navigate across all US options exchanges to provide best execution. Its Trader Instinct platform offers trading and consulting services, with access to the liquidity of one of the world’s largest private client and institutional networks.
BEST FX DERIVATIVES PROVIDER: CITI
Citi’s global presence—it has currency-dealing desks in 83 countries—enables it to trade in volume in many currencies. CitiFX Pulse, the bank’s e-platform for corporations, provides 24-hour, real-time access to FX spot, forward, nondeliverable forward and swap prices in more than 400 currency pairs. The use of currency derivatives is embedded across Citi’s wide range of client offerings.
BEST COMMODITY DERIVATIVES PROVIDER: MORGAN STANLEY
The Federal Reserve is examining the role of banks in the physical commodities markets. Morgan Stanley has long been a leader in commodities derivatives trading. It had a market share of 37% in 2012 in global energy derivatives and 22% in metals derivatives. Morgan Stanley also has stakes in companies that generate and market electricity and manage oil and chemical tankers.
BEST INTEREST-RATE DERIVATIVES PROVIDER: DEUTSCHE BANK
Deutsche Bank is the leading bank in Europe for interest rate swaps and options. The bank is also a global over-the-counter interest-rate derivatives clearer. In September it cleared the Australian Stock Exchange’s first OTC rate swap, which was executed between itself and the Commonwealth Bank of Australia.
BEST CREDIT DERIVATIVES PROVIDER: CREDIT SUISSE
Credit Suisse has successfully adapted to new capital requirements under Basel III by slashing its risk-weighted assets. The bank is focusing on what it does best, including structured credit and single-name, high-yield credit default swaps. This concentration on targeted risk taking has created a new business model for the changed regulatory environment.
BEST EQUITY DERIVATIVES PROVIDER: SOCIÉTÉ GÉNÉRALE
Société Générale provides its clients with access to 70 trading venues with 95% of global equity market capitalization. The bank has introduced systematic indexes that enable investors to tailor their exposure to volatility and other equity market trends. SG is the number-one market maker on Eurex for the VSTOXX volatility index. It launched two new systematic indexes this year based on VIX futures.
BEST FX DERIVATIVES PROVIDER: DEUTSCHE BANK
Deutsche Bank is the world’s largest foreign exchange bank, with a global market share of approximately 15%. The bank’s Autobahn FX trading system was the first to offer online FX options trading. Autobahn Mobile offers indicative FX market trading data.
BEST COMMODITY DERIVATIVES PROVIDER: BNP PARIBAS
BNP Paribas is one of the largest traders and clearers of commodity contracts. In August the French bank sold a bundle of commodity trade finance loans to investors in the first deal of its kind, helping it to reduce its credit risk. BNP Paribas Commodity Futures provides physical delivery across a broad range of commodities. The bank provides financing for collateral and margin required for hedging with futures and over-the-counter swaps that are centrally cleared.
BEST DERIVATIVES PROVIDER: CITI
Citi employs more than 400 derivatives sales and trading experts in 24 countries in Latin America. The bank has concluded derivatives transactions with more than 1,200 institutional clients in the region, including large and small corporations. Its knowledge of local tax, regulatory and legal systems helps it to provide the best risk solutions for its clients and to execute in illiquid markets.
BEST INTEREST-RATE DERIVATIVES PROVIDER: HSBC
HSBC is the leading provider of interest rate swaps, options and forward rate agreements in Asia. The bank’s rates division combines sales, trading, structuring and distribution of fixed-income instruments. With 800 fixed-income specialists in more than 50 countries, HSBC offers cross-border connectivity and a wide range of products.
BEST CREDIT DERIVATIVES PROVIDER: NOMURA
Nomura is committed to central clearing of credit derivatives to create more efficient markets, with greater liquidity and transparency. It joined ICE Clear Europe in 2009 and has growing derivatives franchises in Europe and the United States. Nomura is the leading participant in the domestic derivatives and equity markets in Japan.
BEST EQUITY DERIVATIVES PROVIDER: SOCIÉTÉ GÉNÉRALE
The stimulus measures introduced by Japanese prime minister Shinzo Abe this year created a trading boom in equity derivatives, led by non-Japanese accounts. Société Générale captured a disproportionate share of the activity in Nikkei options volume. The French bank says it was able to handle volumes that increased by 650% from a year earlier.
BEST FX DERIVATIVES PROVIDER: HSBC
Foreign exchange derivatives are the dominant asset class in Asian economies, accounting for about three-quarters of trading volume, with interest rate derivatives a distant second, according to Celent. With operations in 19 Asian countries, HSBC is active in FX derivatives markets throughout the region. It has been a leader in developing the offshore renminbi market.
BEST COMMODITY DERIVATIVES PROVIDER: DEUTSCHE BANK
Deutsche Bank has remained active in Asian commodity derivative markets at a time when other banks have departed the business in the face of new regulatory capital requirements. The bank has helped iron-ore and coal producers to lock in future prices through the use of forwards and options. It is also the leading bank in the region for hedging precious metals and energy prices.
BEST DERIVATIVES PROVIDER: HSBC
As the world’s biggest underwriter of sukuk, or Islamic bonds, HSBC is a major participant in Islamic corporate and investment banking. In the Middle East, its shariah-compliant products and services are focused on Saudi Arabia. HSBC offers more than 100 Islamic hedging products. Derivatives are limited to hedging under Islamic law.
ACHIEVEMENT AWARD: INTERCONTINENTALEXCHANGE (ICE)
The Securities and Exchange Commission in August approved ICE’s planned $10.2 billion takeover of NYSE Euronext, parent of the New York Stock Exchange. The deal will give ICE the leading interest-rate futures business in Europe. ICE and NYSE plan to spin off Euronext to fund the transaction and make it easier to win regulatory approval. In October, ICE Clear Europe, a subsidiary of ICE, introduced client clearing for European credit default swaps, covering European index and corporate single name CDS instruments.
PERFORMANCE AWARD: CME GROUP
CME Group, the world’s leading derivatives market, applied in September to operate a swap execution facility, which would enable customers to execute swaps side-by-side with listed futures on CME Direct. Late last year, CME introduced a swap futures product as a result of the increased costs associated with over-the-counter swaps.