Best prime broker and Best algo provider – BNP Paribas

The implosion of Archegos Capital Management in early 2021 brought back scarcely healed memories of not-so-distant events that rocked the FX prime brokerage (FXPB) space to the core. It also provided market participants with a stark reminder of the importance of a trusted and stable partner that will be there for them through thick and thin.

For BNP Paribas, the sustainability
of its FXPB business is of the utmost importance, and the French bank takes it very seriously.

“The sustainability of our prime business model is really important to us,” says Nathaniel Litwak, global co-head of FXPB at BNP Paribas. “We run and manage the business to be sustainable so that we can be there for our partners and not do something that gets us in trouble. Sustainability is a distinguishing characteristic that we’re very conscious of and are absolutely committed to.”

That commitment has earned the bank new mandates from nearly a dozen of the world’s largest institutional investors over the course of the past year, which Litwak considers as validation of BNP Paribas’s FXPB business from its strategic institutional client base.

“This type of investor only chooses platforms that are well established and that they trust. It’s wonderful to capture mandates from the most competitive clients in the world,” adds Litwak.

With the addition of these large and sophisticated clients, Wojciech Nabialek, global co-head of FXPB at BNP Paribas, explains that the bank began to re-evaluate the risk profile of its balance sheet and that of its clients, and particularly how it can help them minimise risk and optimise their balance sheet. 

As such, BNP Paribas has ramped up its clearing, compression and novation services to help its clients optimise their exposure to margining requirements under the uncleared margin rules (UMR), especially those with significant FX options and non-deliverable forwards (NDFs) trades on their balance sheets.

To help clients reduce notional open positions and by extension reduce their UMR balance sheet exposure in 2020, BNP Paribas rolled out its compression tool and added two new clearing solutions – one focused on clearing the dealer side of NDF transactions and the other centred on full NDF clearing via LCH’s ForexClear.

The French bank also partnered with service provider Capitolis to enable the novation – or tearing up trades by creating new ones – of FX options positions.

“The UMR regime has fundamentally changed the cost structure of FX businesses as more clients are having to post margin,” says Litwak. “For our clients, it has become really important to optimise their balance sheet with regards to UMR costs, and facilitating the compression and novation of positions in an automated fashion reduces that cost of capital. Our partnership with Capitolis helps automate and industrialise that process so that everything is conducted efficiently and at scale.”

BNP Paribas has also been collaborating with an industry-wide body created to look into resolving the allocation of credit by prime brokers – a system that hasn’t changed since it was created decades ago, but has caused significant problems in the digital trading age. After more than a year’s worth of work, Litwak is optimistic that with currently available technology, a solution can be found to everyone’s benefit within the next few years. 

“As there’s now a well-established framework, I do see a path forward, but because it’s at industry level it’s going to take time to get to a tipping point with enough people having the incentive to do this,” says Litwak. “It’s not happening tomorrow, but with a variety of solutions in the pipeline, I think we can expect things to happen in the next couple of years.” 

We run and manage the business to be sustainable so that we can be there for our partners and not do something that gets us in trouble. Sustainability is a distinguishing characteristic that we’re very conscious of and are absolutely committed to”  

Nathaniel Litwak, BNP Paribas

Ramping up algo capability

As BNP Paribas’s algo-using client base has become ever-more sophisticated in the past year, the bank has significantly expanded the product range on its algo platform and made meaningful improvements to the overall user experience. 

Users can now access the functionalities of the Alix trading assistant on all types of mobile devices and even more colour is now supplied around market events. Alix can warn users when, for example, the market reaches low levels of liquidity and explain how the algo is going to adapt its behaviour as a result.

Also, soft stops were introduced so clients could capture the spread as the market nears their stop loss rather than execute in one block at that price. To do so, the bank extended the use of artificial intelligence to its gamma algorithm so the algo could detect how to optimise the execution of a stop loss without paying the spread when it is triggered.  

To build on the surge of NDF trading in the past two years, BNP Paribas expanded the number of currencies its clients can trade through its NDF algos, with the Brazilian real the latest to have been added – the first Latin American currency to feature on the platform.

But, as the bulk of liquidity for the currency is actually found on the onshore B3 Brasil, Bolsa, Balcão exchange in São Paulo, the French bank had to engineer a solution that would allow its over-the-counter clients to take advantage of on-exchange liquidity.

“What we’ve done,” explains Asif Razaq, global head of FX algo execution at BNP Paribas, “is build an algorithm to source liquidity on the futures exchange and then convert that futures transaction into an NDF for our clients, which is an extremely innovative way of sourcing liquidity for the OTC market”.

The product was warmly received by its clients, and, as such, the French bank expects to extend that capability to other currencies in the LatAm region, most notably those of Columbia, Argentina
and Chile.

“It is essential to have a strong onshore presence in order to tap into local liquidity,” says Razaq. “And BNP Paribas’s strength is that we are a local market participant and on the ground in all those countries, which gives us an advantage in being able to source onshore liquidity.”

Not content to stop there, BNP Paribas also decided to broaden its NDF offering to euro crosses, which required building a synthetic NDF, because until now the instrument essentially involved the dollar against another currency on a one-month tenor. At its core, the synthetic instrument comprises three transactions: a EUR/USD spot, a one-month USD/INR NDF and a one-month EUR/USD swap.  

And, taking advantage of the swap market becoming more electronic, BNP Paribas introduced a continuous swap hedge capability to help its clients demonstrate best execution by capturing more price points along the curve, rather than roll over their position at a potentially worse price.       

“The idea behind this is that the algorithm takes a digital pulse of the swap market at regular intervals and locks in a part of that swap at that point in time,” explains Razaq. “For example, when a client inputs an order that has a forward settlement date, the algorithm will execute swap points at regular intervals in parallel to executing the spot leg. At the end of the execution, it will average the swap prices to offer the client a more competitive swap rate. This allows us to track the swap market more accurately rather than wait until the end of the transaction before clients roll their spot trade.” 

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