BEST DERIVATIVES PROVIDERS 2014

BACK TO THE FUTURES

The market in over-the-counter derivatives is shrinking, while exchange-listed futures and interest rate swaps traded on new swap execution facilities (SEFs) are setting records. New regulations and capital requirements are squeezing bank trading desks and forcing more derivatives trading onto exchanges and centralized clearing.

In another step to make derivatives trading safer, 18 of the largest global banks agreed in October not to abruptly end derivatives contracts with each other if one of them gets into financial trouble. The agreement, designed to buy time in case of a Lehman Brotherslike crisis, seeks to curb systemic risk.

The Bank for International Settlements says the gross market value of OTC derivatives outstanding declined to $18.6 trillion at the end of last year from $27.3 trillion at the end of 2011. The bulk of the OTC derivatives trading takes place in interest rate contracts, which dropped to $14 trillion from $20 trillion two years earlier.

Meanwhile, the CME Group says its volume of listed interest rate contracts set a daily record of more than 25 million in mid-October, when rates plunged on worries about a potential global economic slowdown. Trading in dollar-interest-rate swaps on SEFs, which came into being as a result of the Dodd-Frank Act, hit its own record at the same time. There are now 24 SEFs registered with the Commodity Futures Trading Commission in the US.

Regulation is moving the interest rate swap market inexorably toward central clearing and trading, according to Eurex, a German exchange. “That’s why we introduced our euro-swap futures,” Eurex noted at the product launch in September.

A recent report by research firm TABB Group surveyed 40 investment firms and found that 70% expect their listed futures trading volume to increase over the next 12 months.

In the energy markets, the major oil companies have stepped up their market making in oil-product derivatives, as many banks have pulled out of the commodities business. The oil companies are not subject to the same regulatory restrictions as banks and can offer better prices in many cases.

Many banks remain active derivatives traders and liquidity providers, despite the added costs. The market remains concentrated, however. In the US, four large commercial banks still account for 93% of the industry’s notional amount of derivatives outstanding, according to the comptroller of the currency.

Global Finance has selected the World’s Best Derivatives Providers in five main categories across the key regions of North America, Europe and Asia. Awards were also given for the Best Derivatives Providers in Latin America and in the Middle East. Two exchanges were recognized for their accomplishments.

The criteria used in selecting the winners included volume, market share, scope of global coverage, customer service, commitment to the business, pricing, technology and execution skills.

WINNERS PROFILE

Citi is the leading North American bank for interest rate swaps, which exchange one set of cash flows for another, based on interest rate specifications. Most of these derivatives trade in the over-the-counter market and can be customized to meet specific needs. More than half of Citi’s derivatives portfolio consists of interest rate swaps, which generally involve the exchange of a floating-rate payment for a fixed-rate payment.

The credit derivatives market has shrunk by more than half since the financial crisis. With the US economy improving, there is less concern about companies going bankrupt and less demand for credit default swaps. Bank of America Merrill Lynch remains an active trader and liquidity provider in credit default swaps. The bank also receives high marks for its credit research and credit options business.

BofA Merrill Lynch is a leading broker of equity derivatives in North America. Greenwich Associates notes that more than two-thirds of North American institutions active in equity swaps name the bank as an important trading relationship. BofA Merrill Lynch combines competitive prices and effective trading platforms with market advice. The bank is a member of 40 derivatives exchanges globally.

Citi is the top FX derivatives provider worldwide, with currency-dealing desks in 83 countries. Citi’s global presence enables it to trade in volume in a large number of currencies. The bank’s upgraded CitiFX Pulse platform for corporations offers multileg options and exotics. It provides 24-hour, real-time access to FX spot, forward, nondeliverable forward and swap prices in more than 400 currency pairs.

Under pressure from regulators to avoid trading in physical markets, many banks are abandoning the commodities trading business. Goldman Sachs, however, is staying in the business and seems likely to gain market share. It already is the biggest trader of commodity derivatives among banks. Commodities derivatives trading rose 23% last year, according to the World Federation of Exchanges. That was the strongest growth among exchange-traded derivatives.

EUROPE

Deutsche Bank is the leading bank in Europe for interest rate derivatives. The bank’s Autobahn platform is an electronic superhighway for interest rate swaps and a dozen credit default swap indexes, as well as numerous other fixed-income, currency and corporate treasury product offerings. The platform’s CDS trading model’s “hybrid service” offers the back-office benefits of electronic trading, along with the advice that comes with
voice trading.

BNP Paribas is the most active trader of credit indexes in Europe, as well as European bank credit default swaps. The French bank’s global credit trading and distribution platform enables it to design, price, execute and book new products, as markets and the regulatory environment change. With global trading based in London, BNP Paribas offers risk-advisory services and credit option research, along with execution and record keeping.

Société Générale has created systematic indexes that enable investors to tailor their exposure to volatility and other equity market trends. For much of this year, equity volatility remained at multiyear lows. SG responded with volatility exposure that features a built-in hedge. The bank also helped clients exploit buyback anomalies (when stocks from companies that have announced a share buyback see a significant share price rise over a three-to-four-year horizon) relative to underlying indexes around the world. It introduced the first European buyback index and a Japanese buyback index.

The top European bank for currency derivatives, Deutsche has invested heavily in its autobahnFX platform, which has been repeatedly upgraded in recent years. Deutsche was the first bank to offer a complete online FX options service with streaming prices. The Autobahn App Market offers a single entry point for the bank’s electronic services, including research, analytics, charting and trading across assets.

BNP Paribas, one of the largest traders and clearers of commodity contracts, provides financing for collateral and margin required for hedging with futures and options, as well as over-the-counter swaps that are centrally cleared. The bank manages price risks with derivatives on a wide range of underlying commodities, including energy, metals and such soft commodities as coffee, sugar and cocoa.

ASIA

HSBC is the top provider of interest rate swaps, options and forward rate agreements in Asia. The bank is also the leading trader of domestic currency bonds in the region, and it publishes an Asian local bond index. On July 1, clearing of renminbi interest rate swaps became mandatory onshore in China. HSBC is a direct clearing member of the Shanghai Clearinghouse.

Moody’s Investors Service raised the long-term credit rating for Nomura, Japan’s biggest brokerage, by two notches in October to Baa1. The higher rating is a plus for Nomura’s derivatives business, since the firm will meet the counterparty credit requirements of more potential clients. Nomura is the leading participant in the domestic derivatives and equity markets in Japan.

SG has boosted its equity franchise in Asia in the past year with new hires and the acquisition of Credit Agricole’s 50% stake in Newedge, a leading broker and clearinghouse for derivatives. Newedge has an electronic platform for trading and routing orders, as well as processing and centralized reporting of client portfolios. The deal will give SG new prime brokerage and clearing services.

Standard Chartered was one of the first banks to offer newly approved renminbi FX options to Chinese corporates. The London-based emerging markets bank offers renminbi services in 36 countries outside China. Standard Chartered is a major clearer of Hong Kong and Singapore dollars and most other Asian currencies. It was the first to offer rupee options in India.

ANZ’s network spans not only Australia and New Zealand but also 12 countries in the Pacific and 14 markets in Asia, connecting commodity producers with consumers. More than half of China’s imported iron ore comes from Australia. ANZ’s precious metals infrastructure includes a physical gold vault in Singapore. The bank is the largest foreign market maker on the Shanghai Gold Exchange.

LATIN AMERICA

Itaú BBA is the corporate and investment bank of Itaú Unibanco, the biggest bank in Latin America. It has operations in the largest economies in the region, and for the last three years has been the top bank in the Brazilian derivatives market. Inflation-linked products are popular in Brazil, where Itaú BBA is the leader in both interest rate and equity derivatives. The bank is also a major participant in the derivatives markets of Chile and Colombia.

HSBC has built a leading position in the derivatives markets of the Middle East with competitive pricing and a focus on long-term relationships. It is active on 11 exchanges in the region and offers a wide array of shariah-compliant hedging products. The bank is also the world’s leading underwriter of sukuk, or Islamic bonds. HSBC has the largest securities services operation in the region. It is also strong in foreign exchange and local interest rate derivatives.

BEST DERIVATIVES EXCHANGES

The Eurex Exchange offers the widest range of international benchmark products enabling investors to gain exposure to geographic regions and individual countries. The exchange, operated by the Deutsche Börse, offers 2,000 products overall on a single platform. This year it added foreign exchange derivatives and additional MSCI futures and options.

Eurex is the clear leader in derivatives on euro interest rates, and it offers the most-liquid euro-based equity index derivatives. Its new link with the Taiwan Futures Exchange allows it to trade Taiex derivatives during US and European trading hours. To prepare for upcoming regulatory changes, Eurex Clearing Prisma, a portfolio-based margining system, helps investors maximize collateral and free up capital for trading by calculating combined risks across all markets for products that share similar risk characteristics.

The NSE, owned by a group of Indian financial institutions and international investors, is the leading exchange by number of contracts traded on index options and currency options, according to the World Federation of Exchanges. The CNX Nifty options, based on an index of 50 stocks traded on the NSE, had 874 million contracts traded last year. The NSE’s dollar-rupee futures were the most actively traded currency derivatives contracts in the world in 2013.