Nicolas
Marque, global head of equity derivatives at BNP Paribas global markets discusses
how the bank has tackled regulatory changes
by digitising its business and adapting its IT systems, and why investment and
acquisitions in infrastructure make it stand out in the equity
derivatives space.
Will investors’ appetite for equity products continue to grow in 2018 following this year’s surge?
Nicolas
Marque, BNP Paribas: Investors’ appetite for structured equity products
depends on the momentum in the underlying and structuring conditions – momentum
is expected to remain favourable to equities. Although a number of risks have
arisen – high valuations, for example – the consensus is that benign conditions
and attractiveness of equities relative to other asset classes should be
prolonged for most of 2018.
In terms of structuring conditions, 2018 should be more
favourable, with risks facing equities helping volatility increase alongside a
firm expectation of higher interest rates. Structured products are expected to
experience headwinds at the beginning of the year, following enforcement of
Mifid II. Market participants will likely focus more on the go-live of new
systems and adapting more to new regulatory requirements than on new product
issuances or investments. Bottom-line growth of equity structured products is
likely to continue for most of 2018, but at a slower pace and in a bumpier
mode.
How has BNP Paribas tackled
regulatory changes in the financial services industry and adjusted its business
model to new frameworks?
Nicolas
Marque: Mifid II is a wide-reaching regulatory change that impacts the entire
business value chain – both on our side and the clients’. An adaptation of our
IT systems has been essential to meet these new regulatory requirements while
maintaining our efficiency. Digitalisation of our business enables us to
capture the relevant data more easily, change processes quickly, automate
repetitive tasks and ultimately respond to our clients in a seamless manner. We
set up a number of project streams to ensure we are fully compliant under Mifid
II requirements. For packaged retail and insurance-based investment products
(Priips), a task force is in place, with the aim of fully automating the
production of key information documents internally. We believe these changes
will lead to better investor protection and more market transparency, and thus
a more sustainable industry.
What feedback has there been from
clients on BNP Paribas’ Target Income Enhanced Returns (TIER) indexes and Smart
Derivatives?
Nicolas
Marque: The TIER range of indexes has been designed to address two main issues
that clients face: for distributors, how to grow the wallet of structured
products in end-client portfolios; and for real money managers, how to smooth
timing impact on investment returns.
By
implementing daily reverse convertibles in a systematic and transparent
fashion, TIER indexes are a suitable solution for private banking investors,
allowing them to deliver a well-known and appreciated investment profile while
removing timing risk through the smoothing of execution. Institutional clients
have indicated that TIER provides an interesting income profile based on equity
allocation, and is therefore well positioned in the current low rate/low yield
environment.
Compared with a pure equity allocation, the defensive profile also
provides a certain level of diversification, as TIER will typically perform
better in reasonably bear or ranging equity markets.
Clients
have continued to appreciate the versatility of our Smart Derivatives platform.
Some fully utilise its structuring richness – for example the payoffs,
underlyings and structuring tools – which makes it one of the most
comprehensive platforms in the market. Others leverage its business
capabilities by deploying our platform in a customised fashion at different
layers in their organisations to support strategic development and workflow of
structured products within their distribution networks, while containing
operational costs.
What has differentiated BNP Paribas
from its competitors this year, and what is its recipe for success in this
space?
Nicolas
Marque: Critical mass is essential in equity derivatives and even more so in the
distribution business, which requires heavy infrastructure investments –
particularly in the context of new regulatory requirements. BNP Paribas has
consolidated its leading position through a number of acquisitions over the
past few years. The successive risk transfers of equity derivatives books
started with Crédit Agricole in 2014, followed by Royal Bank of Scotland in 2015
and most recently with ING in 2017, which contributed to building this critical
mass and further improving infrastructure and IT.
Since
2012, Smart Derivatives has been recognised as the leading single-dealer
platform allowing clients to manage all of their structured products online.
BNP Paribas was the first to propose a pricing platform of this nature,
revolutionising the structured products industry and continuing to elevate the
platform with new features year after year.
How is the French market evolving,
and what opportunities and challenges does it face?
Nicolas
Marque: Like other European markets, the French market has been suffering from a
low yield and low volatility environment, with clients struggling to find
attractive returns – at least on a relative comparison basis. France is home to
Europe’s largest insurance industry by general account assets (contrat en
euros), with life insurance companies seeking the transition to unit-linked
policies for both commercial and risk management reasons. A structured
unit-linked policy with full capital protection has become the preferred option
for clients, and has subsequently evolved into partial capital protection as
structuring conditions dictated. In this context, there remains room for
product innovation to provide income strategies for clients with lower risk
appetite than traditional equity investors.
A new area of innovation, somewhat inspired by the German market, is a
hybrid product combining general accounts with structured unit-linked policies.
Recent changes in the tax regime (flat tax) could lead to a revival of
investments through securities accounts, which might help further growth.