In the second part of this interview, Renaud Meary, global head of institutional sales for equity derivatives and head of equity derivatives continental Europe at BNP Paribas, discusses about the areas of focus for the bank.
“Our priority is to remain a leading player in the structured products market so we will continue investing in digitalisation,” says Meary (pictured).
In terms of products, the French bank will continue developing its ESG range and the scope of structured solutions addressing at best the ultra-low interest environment for investors. From a geographical perspective, since BNP Paribas is “already present in all relevant markets," the main focus will be in growing market share and capture new clients across jurisdictions.
“The US and China markets come first in our priority list given their depth and the potential for growth we have there,” said Meary.
The French bank has over 708,000 live products across European markets.
ESG has become a driver of activity across markets but still represents a fraction of the market in terms of market share. Do you expect ESG to continue growing its visibility in the market?
Renaud Meary: ESG remains a driver of innovation and activity for BNP Paribas. We were an early mover in this space and this is now a pivotal element of our strategy at group level but also for our equity derivatives business.
In 2019, we saw strong activity and growth around ESG and sustainable investing
We traded our first ESG structured product six years ago, and the initial slow transition towards this segment has turned into a significant expansion. In 2019, we saw strong activity and growth around ESG and sustainable investing.
Particularly worth highlighting is a partnership we closed with Reforest’Action, a company specialised in securing capacity and quota to restore damaged forests and have a positive impact by participating in reforestation projects in developed and emerging markets. This partnership did enable us to propose distributors a number of structures that would offer exposure to sustainable assets but with an additional feature - for each €1,000 invested one tree would be planted. We believe this approach to be quite powerful towards individual investors and we are exploring other initiatives to bring new ideas in this area. We have planted so far over one million trees (as of end of January 2020) which equates to €1 billion in notional just on this partnership.
How are you going to expand your ESG offering?
Renaud Meary: ESG continues to drive demand with investors in many European markets. Our goal is not just to offer products but to provide a comprehensive catalogue of sustainable solutions to meet different needs. As a result, we have increased the number of underlying indices offering ESG exposure.
We can offer ESG products combining the various dimensions of a sustainable product including the use of proceeds (green bond), the underlying and an extra investment feature (eg planting a tree) but they don’t necessarily have to be offered together at the same time. We think the diversification of thematics will continue and we are working on several initiatives around sustainability, including towards the institutional space where the theme has been gaining strong momentum lately and we believe we can offer guidance and solutions to our clients.
Decrement indices help to optimise structured products
The profile of decrement indices continues to increase. What is your take on these indices?
Renaud Meary: This trend is not new per se, but the increasing adoption of these indices suggests investors have a better understanding of the features structured products can offer to achieve their goals.
Decrement indices help to optimise structured products by removing the spot/dividend sensitivity and by enabling a fine tuning of the forward and the likelihood of cancellation vs the triggers. It is however important investors understand what they are buying, that they are not just looking at an attractive coupon without being aware of the corresponding risks.
We believe that in the interest of market sustainability, there is a limit to the explicit or implicit decrement rate applied to the index.
Over the last couple of years there has been a significant increase around repackaging. Is this an area of focus at BNP Paribas?
Renaud Meary: Our repackaging capabilities have also been a driver of activity and sales within equity derivatives. We have a very flexible and adaptable set up in terms of repack, which proved very timely last year in the context of negative or very low interest rates. It enables investors either to extract some additional value for the derivatives structure they want to invest in, or to add a typical FX or rates overlay to existing bond positions.
We completed dozens of repack transactions in 2019 with very different type of clients which suggests that investors looking for flexibility to combine the payoff and issuer risk saw value on our offering.
The market is moving towards technology and automation. What is the value of the SmartDerivatives platform within the bank’s equity derivatives business?
Renaud Meary: Having SmartDerivatives is key for us to be a leading provider of structured products market. Technology is a ‘must have’ in this market nowadays. We have a very powerful technology backbone and digital set up in our SmartDerivatives platform which has helped us to increase our connectivity and put powerful tools in the hands of our clients. We have developed a mail parsing technology aimed at distributors and we have now more than 50 buy-side firms using this facility.
The goal is to continue growing and expanding the platform with new tools, functionalities and products. We are now working in complementing our equities and commodities offering with new asset classes such as credit, hybrids, and rates. We are also developing another platform called BRIO, designed for institutional investors mainly, offering a wealth of services and functionalities in the portfolio management area, by providing various analytics, risk management features, and the possibility to simulate incremental trades and execute them on the platform. It also provides similar features in the QIS environment.
What is the main value of structured products platforms? Is the reverse enquiry model phasing out?
Renaud Meary: For us, the goal is to minimise the time investors and advisors spend on operational aspects so they can focus on higher added value tasks. This is the main value of digitalisation and it translates into actual figures. When we compare today’s ticket sales with those of five years ago it has more than doubled: last year we traded more than 30.000 primary tickets in the structured space, versus hardly 15.000 in 2015.
We need to be aware though that the objective of having a fully automated set up in the structured product space remains a dream at this stage. While we see the buy-side making progress and looking at ways to embrace technology to optimise processes and operational aspects, the human component remains an important element of this business given the highly technical nature of the products at stake. Most clients prefer to speak to their sales to optimise the structure until the last moment, and to execute a transaction in the system. One exception is probably the HK and Singapore market, where almost 90% of the trades are fully automated.