The third annual Global Finance awards for the World's Best Derivatives Providers honor the banks that have excelled in their service to corporations in each asset class across the three main financial regions of the world-North America, Europe and Asia-and, in a new addition to the awards, the best derivatives bank in the Middle East.
The derivatives markets continue to grow at an extraordinary pace. In the first half of 2006 the notional amount outstanding of credit default swaps (CDS) grew by 52% to $26 trillion from $17.1 trillion while the annual growth rate was 109% from mid-year 2005, according to the International Swaps and Derivatives Association. The notional amount outstanding of interest rate derivatives, which include interest rate swaps and options and cross-currency swaps, grew almost a fifth to $250.8 trillion from $213.2 trillion. The annual growth rate for interest rate derivatives to mid-2006 was 25% from $201.4 trillion in mid-2005. Similarly, the notional amount outstanding of equity derivatives, which consist of equity swaps, options and forwards, grew from $5.5 trillion to $6.4 trillion. This represents year-on-year growth of 33% from $4.8 trillion at mid-year 2005.
The Global Finance awards aim to recognize strength and power in the rapidly growing derivatives markets, and that means that scale is important. Derivatives products inevitably commoditize and become volume-driven markets. Moreover, it is clear that the backing of a major force in the inter-dealer markets provides a bank with clear advantages. However, the awards also are mindful that biggest is not necessarily best. Therefore, of equal importance to scale in deciding the winners of the awards is the innovative ability of the investment banks in competition. Intellectual acuity plays a greater role in deciding which banks dominate the derivatives market than in any other market. Finally, competitive pricing, customer support and execution capability-all integral parts of successful product delivery-are also part of the equation when deciding which banks are at the front of the field.
The awards were based on a number of sources. The opinions of treasurers in each of the four regions were sought, and other non-market participants, such as analysts and consultants, were canvassed. This information was then combined with market intelligence from the Global Finance editorial team to produce the final results.
NORTH AMERICA
BEST COMMODITY DERIVATIVES PROVIDER
MORGAN STANLEY
Although Morgan Stanley has faced stiff competition from the likes of Barclays Capital-which wins the commodity derivatives provider award for Europe-the scale of the US bank's operation and its appetite for innovation has secured it a second successive award from Global Finance. At the heart of the Morgan Stanley operation is a deep understanding of how commodity markets work resulting from the bank's involvement in physical commodities.
Morgan Stanley has used its derivatives expertise as part of complex structured transactions effectively. Unlike other recent entrants to the business, it is able to warehouse and manage market risk. Consequently, it is well positioned to take on complex derivatives deals. It has successfully managed a number of volumetric production payments (VPP) deals related to the sales or purchases of producing assets in the United States, incorporating multiple delivery points and long durations.
Among Morgan Stanley's standout deals involving the commodities team this year was the $1.55 billion issuance of notes by Egyptian General Petroleum Corporation. In order to improve the credit rating on the note, EGPC needed to ensure a minimum cash flow to underlie the notes. It did this by entering into a forward sale agreement of physical crude oil and hedged the value of those sales, using the expertise of the commodities department. The bank also facilitated Complete Energy Holdings' purchase of the La Paloma Generating Facility, a power plant in California. Morgan Stanley provided La Paloma with a sevenyear tolling agreement that locked in 72% of the plant's gross margin. Providing the derivatives hedge for the plant's earnings enabled the commodities department, in conjunction with the firm's debt and equity financing groups, to successfully manage a $581 million acquisition.
BEST CREDIT DERIVATIVES PROVIDER
JPMORGAN
JPMorgan's staying power in the credit derivatives market is impressive. Having virtually invented the market in the 1990s, the bank has continued to play a major role in almost every innovation since then. As the pace of market innovation has quickened, JPMorgan has responded by increasing investment and upping its game further.
In a market that commoditizes new products within as little as a year, there is no scope for complacency. JPMorgan's continuing strength in credit derivatives owes much to the integration of its credit operation. Traders operate in both the bond and derivatives markets and sit with the flow team. The result is a constant stream of trading ideas that reinforces JPMorgan's strong product innovation.
JPMorgan's commitment to the broader development of the market is second to none. The bank has worked hard to increase transparency and also to educate market participants through the provision of research and other information. Moreover, JPMorgan has a strong track record of developing technological tools to aid investors and other market players.
BEST EQUITY DERIVATIVES PROVIDER
SG CIB
Soci é Générale (SG CIB) has long been known as one of the pioneering players in the equity derivatives field in Europe and Asia, but until recently it has always been outgunned in the crucial US market. While it is still far from the largest bank in the market, SG CIB has made up in innovation what it lacks in size.
Among its interesting innovations for corporate clients this year was a solution for companies needing to finance their development while not increasing their level of indebtedness. The solution was demonstrated in a deal for cancer treatment company Cell Therapeutics, which is headquartered in Seattle with labs in Milan. As a biotech company with a gradual need to finance its research and development, Cell Therapeutics was reluctant to issue new equity. Instead, SG CIB could offer the company its PACEO product, which allows a corporate to secure a future capital increase (through an option guaranteed by SG CIB) and to optimize their equity issuing timing (the management of the company retains total control of the decision to launch the issue).
The key to the deal's success was SG CIB's ability to tailor-make financing, granting the company the right to sell new common shares to SG at any time during a two-year period with a fixed discount limited to 6%. While Cell Therapeutics' euro 45 million PACEO deal, which could raise the market capitalization of the company by more than 40%, is relatively small in size, it has great potential in R&D-heavy industries and could prove significant.
BEST FX DERIVATIVES PROVIDER
CITIGROUP
Citigroup s commitment to its customers is backed by extensive investments in e-commerce and technology, research and advisory services, and sales and trading. The bank has expanded its value-added teams and simultaneously introduced the most aggressive pricing in the market. The results have been impressive: A poll this year showed a 40% increase in market share, solidifying Citigroup as the industry leader for corporates.
Among the innovations developed by Citigroup are deal-contingent forwards and options for companies involved in M&A activity. Usually companies decline to hedge their market risks, including currency risk, before a deal closes because of concerns about the expense and the possibility that the deal may fail, leaving them with a loss. Citigroup's products allow corporates to lock into forward hedges (options or swaps) at a pre-agreed rate but also have the ability to walk away from the liability if the exposure does not materialize.
Another interesting structure was developed for Citigroup's European airline clients, which have a constant need to buy dollars in order to purchase fuel and have therefore benefited from the depreciation of the dollar. Unsurprisingly, airlines are keen to lock in current FX rates, and Citigroup proposed a structure to two airlines whereby they would enter into strips of monthly forwards where they would profit from a rate better than the forward rate and where the final maturity depends on the spot rate at the end of 2006. In case the European currency-US$ spot exchange rate at the end of 2006 is above a pre-defined threshold, the structure is extended beyond 2006. If spot is below the threshold, the structure terminates.This auto-extendable feature enables these airlines to achieve an enhanced hedging rate by monetizing their indifference to being locked at this rate for a longer period.
BEST INTEREST RATE DERIVATIVES PROVIDER
MORGAN STANLEY
While 2006 has been a challenging year for trading, with a flat yield curve, low implied volatilities and no clear direction in underlying rate markets, Morgan Stanley used the opportunity to develop innovative new products, such as forward volatility contracts and contingent swaptions, which met their clients' requirements.
One of the difficulties experienced by market participants this year was managing exotics risk. In particular, Wall Street was hit with a large amount of digital yield curve options arising from structured note issuance. Rather than selling these options to other dealers, Morgan Stanley was able to recycle the risk into other useful risk-management products.
Robust activity in Morgan Stanley's capital market and investment banking franchise, greater flow volume and intelligent risk taking have revitalized the bank's US dollar derivatives businesses. Several years of effort to integrate Morgan Stanley's interest rate businesses and to improve its processing technologies have allowed it to expand its top and bottom lines. Morgan Stanley also continues to benefit from its global reach and pre-eminent position with foreign investors as a derivatives provider, which has particularly benefited its structured note, volatility trading and overall derivatives performance this year. Necessarily, as this business grows, the benefits for corporate clients also accrue-not least in the form of lower costs.
EUROPE
BEST COMMODITY DERIVATIVES PROVIDER
BARCLAYS CAPITAL
Barclays Capital has invested significantly over the past seven years with the aim of becoming a leading investment bank in commodity risk management and financing, and it has paid off. The energy, creativity and focus on excellent client service of the 160 dedicated trading, sales and research staff means that the firm is now one of the top players in all the major commodity asset classes while remaining at the forefront of innovation.
The firm offers a diverse range of financial and physical products including crude oil and refined products, industrial materials and precious metals, power and natural gas, coal, plastics, environmental products and hybrid derivatives. In 2007 it hopes to grow or to establish businesses in agricultural products, pulp and paper, and liquefied natural gas.
One of the strongest growth areas for Barclays Capital in both 2005 and 2006 has been risk management products for corporate clients. Demand has increased as a result of market conditions, which continue to be dominated by price uncertainty, high volatility and heightened attention to potential scarcity of supply. Barclays Capital has been able to execute long-term strategic hedges for clients with even illiquid gas indexation exposures. Outside the corporate market, Barclays Capital deserves applause for creating the first managed collateralized commodity obligation (CCO).
BEST CREDIT DERIVATIVES PROVIDER
JPMORGAN
JPMorgan is a name synonymous with the credit derivatives market. Having effectively invented CDS in the 1990s and been at the forefront of structured credit, it has been a crucial player in the development of the market. The bank continues to commit huge resources to credit derivatives in order to build on its impressive legacy.
In the past year it has enjoyed substantial success with its principal protected collateralized synthetic obligation and is now using the same technology to allow investors to gain the same benefits with a mixed portfolio of bonds, derivatives and other instruments. Meanwhile, in the loan CDS market, JPMorgan is making great strides in introducing non-cancelable instruments, which would survive a restructuring of a company's debt.
While corporate use of credit derivatives remains lower than that of investors, it is increasing. Companies are progressively more eager to use CDS to hedge against counterparty risk incurred through trade receivables. As the credit cycle turns, this aspect of the business is expected to grow further.
BEST EQUITY DERIVATICES PROVIDER
SG CIB
Société Générale's equity derivatives business has seen exceptional growth over the year. That growth is based on serving a broad range of clients rather than from one particular market. The bank's offerings in the listed, structured and hedge-fund-linked sectors further widened the gap they enjoy over their pan-European competitors. In addition, SG CIB has become a leading player in flow business.
Despite the increase in competition in equity derivatives, SG CIB has maintained its leadership role in the market and its ability to stay ahead of the pack. It has done this by investing significant resources: It plans a 20% increase in the number of staff for its European front-office platform this year, giving it 700 professionals across the region.
In product development, SG CIB capitalized on its long record of innovation. Its work in advance of electricity giant Electricité de France's euro 6.35 billion IPO in November 2005, the year's largest, paid off. As a major privatization, the deal was always going to be a political hot potato. But the successful employee share ownership scheme, structured by SG CIB, took much of the sting from union opposition to the listing. Moreover, it created a lucrative investment for both management and employees alike.
BEST FX DERIVATIVES PROVIDER
DEUTSCHE BANK
Already one of the largest FX derivatives providers in Europe, Deutsche Bank has managed to increase its market share in the region, with most observers reckoning that the bank now has a market share of as much as a fifth of all FX derivatives trades. This success stems from a belief that clients require two things: best execution and smart advice. In order to achieve these aims, it has focused unrelentingly on client technology and product innovation.
Deutsche Bank uses its structuring expertise, balance sheet strength and global breadth to provide clients with structured solutions to both their Asian currency and G-7 currency needs. In May 2006 it launched dbfx, which provides 24-hour online margin foreign exchange trading services to clients around the world. Clients benefit from streaming quotes on competitive spreads in 24 currency pairs.
In 2006 Deutsche Bank's autobahn FX was updated to include additional currency pairs for options trading, 24hour live streaming prices for new products including FX indexes and baskets on major currencies and precious metals, and 24-hour live streaming prices for 1RS (interest rate swaps) in a variety of currencies, tenors and payment frequencies.
In response to corporate client needs, Deutsche Bank has also created a suite of innovative hedging solutions that provide enhanced payoff profiles and market participation without compromising the requirement for hedge accounting compliance.
BEST INTEREST RATE DERIVATIVES PROVIDER
BNP PARIBAS
BNP Paribas ascribes its success in the European interest rate derivatives market to one thing: innovation. As a French bank, BNP Paribas inevitably comes with a legacy of high-technology and cutting-edge products. But the bank has transformed that focus on product development into an art form, with a higher proportion of quants, which develop products, to traders than other banks. In addition, the research team, which is headed by an ex-trader, is intimately involved in the business side of BNP Paribas.
While many research teams sit on a different floor from traders-and effectively inhabit a different world-at BNP Paribas the two units are closely linked, making it easier to be cutting edge. The result is a constant stream of new products that has won BNP Paribas substantial market share in some of the hottest products in the past year such as constant maturity swap (CMS) spread products.
As rates have risen in the past year, corporate involvement in the interest rate derivatives markets has increased. Although some companies remain hesitant to use derivatives following the introduction of accounting standards such as IAS39, BNP Paribas has been able to structure a number of slightly exotic derivatives products that fulfill client objectives while still qualifying for hedge accounting treatment-the Holy Grail for corporates.
ASIA
BEST COMMODITY DERIVATIVES PROVIDER
CITIGROUP
Citigroup has increased its commodity derivatives team from three to 10 to accommodate increased demand and has established a presence in metal trading for the first time in the region. The bank has also added coal, indexes, baskets and quantos (options that remove foreign currency risk) to the portfolio of products it trades. Of the team of 10, three marketers and one structurer, with experience in various industries working with different levels of customers including government officials, focus on corporate customers and investors.
Much of Citigroup s success in the field can be attributed to close cooperation between the investment bank, corporate banking and emerging markets sales and trading. The growth of the commodities derivatives business can also be ascribed to Citigroup's focus on educating regulators and government officials in Asian countries to introduce them to commodities and helping them formulate plans for local companies. The result of Citigroup's increased investment and strengthened focus on commodities in Asia has been that it picked up some prized mandates to act as a counterparty for hedging oil, including two from leading airline companies in Asia and one from one of the top oil refineries in India.
BEST CREDIT DERIVATIVES PROVIDER
BNP PARIBAS
Corporate use of credit derivatives in Asia is at an early stage of development, but as one of the top-five CDS dealers in Asia and a leading structured portfolio dealer BNP Paribas is well positioned to benefit from growth in the market. The credit derivatives trading group covers flow and exotic trading with a global trading presence and has one of the largest headcounts in Asia.
This strong regional presence is most obvious in BNP Paribas' local structuring team with full execution capability and a large team of front-office stafFbased in Hong Kong and Singapore. The bank's leadership in Asian credit derivatives also comes from an impressively streamlined organization with an integrated trading platform on bond flow CDS and exotic products. The liquidity this operation generates enables BNP Paribas to offer competitive credit protection to corporates.
BEST EQUITY DERIVATIVES PROVIDER
SG CIB
The battle for dominance in the Asian equity derivatives market involves the usual suspects from the world of investment banking, but competition is perhaps fiercest between two French banks-BNP Paribas and Société Générale-than any others. This year SG CIB pipped BNP Paribas to the post and unseated its rival from the award it won last year.
SG CIB has striven to broaden and enrich its product offering, services and client base. Many of its achievements have been in areas not directly linked to corporate clients. It has pioneered a range of structured funds for distributors to sell to retail investors, led the race in establishing a dividend swap market on the Nikkei 225 and introduced a new approach to volatility trading in Asian markets. However, corporate clients do benefit from the increased liquidity and flexibility that SG CIBs strength in the institutional market creates for them.
BEST FX DERIVATIVES PROVIDER
HSBC
The FX market has continued to grow at a stellar pace in 2006 and is now establishing itself as an asset class, according to HSBC. There has been a change in focus among participants away from Asian appreciation-the renminbi revaluation story-toward macro type of trades such as the BRIC basket of Brazil, Russia, India and China. While precise market-share figures are impossible to come by in the FX market, recent market surveys have given HSBC a market share of 19% for FX derivatives in Asia ex-Japan-almost double its share the previous year and far ahead of its nearest competitor at 10%.
HSBC has increased its lead because of its constant investment in technology, which has given it the ability to offer clients tailor-made products in a timely manner. It has also benefited the bank by enabling it to better manage risk so that it can offer more competitive pricing while improving its process for flow business. Of course, the other element in HSBC's Asian success is its incomparable local footprint, which means that few banks can rival it for distribution.
BEST INTEREST RATE DERIVATIVES PROVIDER
STANDARD CHARTERED
Interest rate derivatives activity has experienced strong growth in Asia in the past year, with volumes up more than 25%. Constant maturity swap spread range accruals and dual range accruals have been popular in the past year, according to the bank. And while many of Standard Chartered's markets have seen new entrants, the bank has proved that it can offer greater liquidity and solutions beyond the perceived maturity limitations of the yield curve or in size without compromising price.
Standard Chartered has also been innovative in second-generation products in countries like Indonesia, introducing multi-callable features to structures; in China it has pioneered on-shore local currency structured deposits; and in Malaysia and the Gulf it has successfully handled a number of Islamic transactions, using a structure developed by Standard Chartered that is both Shariah-compliant and non-balance-sheet-intensive.
Standard Chartered has consistently worked with central banks, regulators and clients to develop new markets. For example, in Pakistan it has been helping clients hedge their interest rate exposures for more than two years. Impressively, the bank is not focused just on big headline deals but also on spreading the advantages of using derivatives to its whole customer base. Moreover, its branch network throughout Asia means that it can distribute its product widely, and its local presence gives the trading desks the ability to use local knowledge to find the best or most advantageous solution for its clients.
MIDDLE EAST
BEST DERIVATIES PROVIDER
HSBC
Strong energy prices have reinforced the rapid growth of the financial markets in the Middle East this year. While the derivatives markets in the region are still at an early stage, banks have been jostling to develop products that suit the region's investors and corporates. Those banks with a well-established local presence and long-standing connections-most notably HSBC-have prospered as a result.
Demand for Shariah law-compliant financing tools is growing and is the most promising area of derivativesrelated activity in the region. HSBC's Shariah-compliant collateralized commodity murabaha (SCCCM) deserves a special mention for providing customers with an Islamic alternative to hedge floating-rate debt and assets. Shariah restrictions on gharar (uncertainty) and riba (interest) have made it difficult to offer Shariah-compliant solutions to hedge floating-rate debt/assets. (Shariah disallows interest rate swaps on the premise that earning/paying a return on pure cash equates to interest.) The challenge was to develop a solution that filled this gap in the marketplace.
SABB, HSBC's operation in Saudi Arabia, developed a structure that replicates the flows of a conventional swap and provides customers with the ability to convert from a floating-rate liability or asset to a fixed one or vice versa. Impressively, this financing solution was achieved with overall pricing similar to a comparable conventional swap.
EXCHANGES
ACHIEVEMENT AWARD
INTERCONTINENTAL EXCHANGE
Atlanta-based Intercontinental Exchange, also known as ICE, has had a momentous year. In April 2005 it closed its open-outcry International Petroleum Exchange (IPE) in London against a backdrop of predictions of doom from some market observers and became an electronic exchange. Instead, the gamble has paid off, and volumes have increased substantially. Meanwhile, a Dublin-based challenge by its rival, the New York Mercantile Exchange (Nymex), which set up a trading floor in Dublin, so far has failed to steal IPE s customers.
While some of the increase in volumes undoubtedly would have occurred without the move to electronic trading, there is evidence that growth has accelerated because of the decision. Moreover, the increased efficiencies-and the ability to add products more quickly than its rivals-that have resulted from the change to electronic trading have made ICE one of the most dynamic players in the exchange world.
In November 2005 ICE became a public company-a change it quickly took advantage of. In September this year ICE announced that it had agreed to acquire the New York Board of Trade (Nybot) for about $1 billion in cash and stock. The stock element of the deal was crucial: Less than a year after listing, ICE has rocketed by more than 75%, giving it vital currency to fuel its growth. The purchase will give ICE exposure to the rapidly growing non-energy commodities market for the first time as Nybot deals in cocoa, coffee and sugar. In addition, ICE will benefit by acquiring a clearing house for the first time, giving it the potential to increase its margins in a notoriously cutthroat business.
PERFORMANCE AWARD
CHICAGO BOARD OPTIONS EXCHANGE
In 2006 one of the main sources of derivatives volume growth in the US has been in individual equity options, and one of the main beneficiaries of this growth is the Chicago Board Options Exchange (CBOE). In the first four months of the year volumes grew more than 40% on the same period a year earlier. Average daily volume for the month of September was 2.6 million contracts, up from September 2005 s average daily volume of 1.9 million contracts. For the month, total volume at CBOE was 52.5 million, up 27% over September 2005.
This growth has been fueled partly by a constant stream of new products, including futures on the CBOE S&P 500 Buy Write Index and options on the CBOE Exchange Index in September. CBOE is also positioning itself for consolidation of the exchanges market: On January 1,2006, it initiated the process of converting from a membership organization to a for-profit business model. Already the changes have been felt, with a streamlined infrastructure and a scaled-down operating budget as part of CBOE's overall mission to create greater strategic flexibility.
© 2006 Global Finance Media Inc. Provided by ProQuest LLC. All Rights Reserved.
Source: Global Finance
