Features : The World’s Best Derivatives Providers

As the use of derivatives for risk management and cash management continues to grow dramatically, the opportunities and challenges for providers are multiplying.

Global Finances second annual awards for the Worlds Best Derivatives Providers recognize the banks that have excelled in their service to corporations in each asset class across the three main financial regions of the world. This service is judged in terms of not only competitive pricing and execution capability but also crucial considerations such as customer support, product expertise, research and innovation.

The awards were compiled through the canvassing of opinions from treasurersinvolved in all three regions at both the national and international levelsand non-market participants, such as analysts and consultants, combined with market intelligence garnered by the editorial team. Biggest therefore does not necessarily mean best, though the backing of a major force in the interdealer markets does provide obvious advantages that, if augmented with product innovation and strong service levels, can make for a formidable package.

As with last year, efforts to integrate across asset classes emerged as a major theme. With treasurers time at a premium, it makes increasing sense for banks to offer a holistic risk management service rather than artificially channeling the business into product silos. As one banker put it, this combined approach enables his team to be more innovative and focus on whatever key issues keep treasurers and CFOs awake at night, be it share price, leverage or whatever else.

Another key theme the banks have been seeing over the past 12 months is the growth in corporate cash holdings, which has in many cases afforded opportunities for the creation of innovative derivatives-based cash management strategies. Additionally, regulatory changes in Europe and the United States have added an extra dimension to the consideration of risk and methods of mitigating it.

As ever, long-standing relationships between banks and their corporate customers count for a great deal. However, no franchise is immune to competition. With the growing commoditization of certain types of derivatives on the one hand and the increasing sophistication of corporate treasuries on the other, resting on their laurels is a sure way for derivatives providers to abdicate market leadership.

Russia Remains a Step Behind

Although some Russian companies manage to hedge currency and rates risk offshore, usually via London, unresolved legal and regulatory issues mean that onshore use of derivatives by Russian-domiciled corporates is practically non-existent. Tax treatment of hedging is so unfavorable as to make it more expensive than it is worth, and use of cash-settled derivatives is legally classified as gambling and therefore not subject to protection in the courts.

New derivatives laws are expected soon, though this has been the case for the past few years, and developments have been subject to numerous delays. What derivatives business there is in Russia is predominantly institutional, though the market is much less developed than in the worlds major financial centers, with notional derivatives values still below the level of trading in the underlying assets.

Equity derivatives volumes are growing on the FORTS exchange, which trades futures and options on futures on a small range of single stocks and a stock index. However, the bulk of deals are transacted in the over-the-counter markets, facilitated by investment firms such as Troika Dialog, the first to set up a desk trading Russian equity options. We provide liquidity and firm prices for Russian and overseas institutions trading in very large sizes, says Georgy Mirel, director of equity derivatives trading.

Troika does a limited amount of work for corporates under the current regime, advising on staff equity option schemes. The firm is watching the regulatory situation closely and anticipates picking up significant corporate business when the rules are eventually relaxed. Once the limitations are less strict, we expect the business to boom, but the institutional business will be the driver for the next year or so, says Mirel.

See our award winners

Mike Topping