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
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.
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