BBVA has increased the activity of its equity derivatives division by more than 100% since the launch of its partnership with Bloomberg, to provide a bespoke structured products and real-time pricing platform for institutional investors. SRP spoke to Emilio Sainz de Baranda (pictured), global head of equity derivatives sales at BBVA, about the bank's plans to leverage the new automated set up to grow its structured products business.
The structured products market is going through a technology revolution and there is a clear move towards automation, according to Sainz de Baranda. "For us the partnership with Bloomberg came as a no-brainer because they offered us the possibility of plugging-in our pricing to their terminals which are used by all our institutional clients on a daily basis," says Sainz de Baranda. "We did consider developing a full platform internally but we concluded that another single issuer platform would not bring anything new to the table while the partnership with Bloomberg provided us with scope to develop this segment of the business while associating ourselves with a well-known and recognised brand in the market."
As the German market has seen recently with Commerzbank's Wunschzertifikat, which is supported by Boerse Stuttgart, new online platforms offering bespoke structured products to investors are getting momentum, although Sainz de Baranda points that such platforms are targeting a channel the Spanish bank is not interested in getting involved for the time being.
"Exchanges have the capabilities and infrastructure to provide this kind of connectivity to brokerage firms working for retail investors or to the end investors itself but institutional investors are a different type of investor," he says. "Our service is focused on private placement-type of investments with significant higher volume per ticket than those traded on-exchange. Single tickets on the BBVA/Bloomberg platform can be of up to €3m."
According to Sainz de Baranda, BBVA remains committed to serving institutional clients and has no plans to enter the listed products segment.
"We have a warrants program and over 2,000 warrants listed in the Spanish market but what we're offering through Bloomberg is a completely different product," says Sainz de Baranda.
In the new BBVA/Bloomberg platform clients can price autocallables such as Athena and Phoenix structures, as well as reverse convertible structures in a note and swap format, says Sainz de Baranda, adding that in this segment the bank offers 160 underlying assets and plans to increase this number to 400 from the beginning of September onwards.
"This includes single European (including Spanish blue chips) and US stocks, international indices and ETFs," says Sainz de Baranda. "With the payoff profiles we are offer, we cover most of the needs of our private banking clients but we remain open to new opportunities and we will also respond to client demand accordingly. We want to grow the offering organically as opposed to taking an out-of-the-shelf approach."
Despite the clear shift in the structured products market towards automation, and the increasing pressure on the reverse enquiry model, Sainz de Baranda remains cautious as he thinks human relations "will not disappear" in the financial services industry and the human component "will remain key in the structured products market".
"However, it is true that platforms are changing the face of the market and how private banks and advisers can work with their clients," says Sainz de Baranda. "The most significant change is the speed with which investors and private banks can transact products and this is a significant improvement from the old set up."
In the past, according to Sainz de Baranda, responding to a pricing query would take around one day and then about an hour or more. "With the new set up clients would get the pricing in real time," says Sainz de Baranda. "Additionally, the platform offers flexibility when submitting a request."
The BBVA/Bloomberg platform responds to the three main needs of the bank's private clients which include speed to receive quotes/pricing, competitive and non-indicative executable prices and a hub where to find the assets and structures that will meets their investment needs, says Sainz de Baranda, noting that the natural evolution of this framework is to eventually have a multi-issuer platform set up.
"That is a natural evolution of this market and it will be sooner than later when we see this approach taking off," he says. "Once a third party provider can offer a hub where different banks are plugged and offer pricing on a level playing field basis it would be difficult for investors to turn their back to them."
At the moment there is fragmentation and a number of business models but eventually there will be consolidation, according to Sainz de Baranda. "Our decision to partner with Bloomberg is also linked to this," he says. "We think Bloomberg has the infrastructure, capabilities and knowledge to serve this market."
The focus in this segment of the market up until now has been on connectivity and price discovery but developments are happening fast in the market. The BBVA/Bloomberg platform offers execution capabilities and each price provided can be executed within a three-minute window, according to Sainz de Baranda. Once a client has submitted the parameters of the trade the system will provide a code with which the trade can be executed.
"Automating execution requires a more complex technical approach as there a number of Mifid 2 provision to abide with," says Sainz de Baranda. "However, we have address that issue by generating a code that clients can use to call us, and confirm the trade after a few checks."
The impact of the new platform across BBVA's equity derivatives business has been phenomenal. "We have increased our activity in this segment of the business by more than 100% and that gives you an idea of how powerful the connectivity via Bloomberg has been for us," says Sainz de Baranda. "The fact that the process is now almost fully automated does not mean that we can reduce our work force because that increase in activity requires the human element to manage it."
According to Sainz de Baranda, this kind of platform is not only helping to streamline the pricing and trading process for issuers and investors as it is also addressing a number of requirements from upcoming regulation around transparency and best practice.
"The feedback we get from clients is that the experience is completely different because they can play with different variables before requesting a quote, and that is also putting the tools in the hands of investors for them to take ownership of the investment process," says Sainz de Baranda. "Clients will benefit even more once the market moves into a multi-issuer set up as they will be able to shop around and see how pricing is also sensitive to the credit rating of the issuer and so on. The move towards automation is helping to educate the market and that can only be positive to continue moving forward."
However, according to Sainz de Baranda, the multi-issuer set up will only work if the hub is provided by non-issuing third party.
"There have been a couple of attempts to get this approach off the ground but is doesn't seem to be getting the traction the [market] expected," he says. "In my view a third party such as Bloomberg provides the best infrastructure and a level playing field for any issuer which means that all issuers can compete for trades without having any issuers always coming on top because they have last look."
Ultimately, BBVA assessed a number of providers in the platform and technology space and concluded that Bloomberg "offered the most comprehensive service and an integral platform that can help us with our structured products business but also on a number of other product lines".
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