Spotlight on: Carl James, BNP Paribas Investment Partners

Increasing market share in foreign exchange is a common, albeit challenging, objective on the sell side this year, as banks seek to take advantage of the relatively low-risk, low-capital asset class to generate revenue in a newly regulated environment. But FX growth is an equally important objective for some buy-side firms, including BNP Paribas Investment Partners, the asset management arm of BNP Paribas.

For Carl James, global head of fixed income and FX trading at BNP Paribas Investment Partners in London, the goal is to double the volume of FX business over the next six months. At present, the firm executes roughly 2,500 trades per month, across spot, forwards and options.

James's team, which includes 40 dealers across 11 desks in Europe, Asia and the US, is transitioning to BNP Paribas Securities Services, the custody division of the BNP Paribas group. Under that umbrella, the potential of the dealing services team to reach new clients will increase, James believes.

"This strategic move has allowed us to offer our dealing capabilities to external clients. We are knocking at the doors of asset managers and wealth managers. We act as a trading consultancy and we can put together trading strategies for our clients that trade FX both as a hedging tool and to generate alpha," he says.

James joined Fortis Investment Management five years ago as global head of trading, just two years before the firm was acquired by BNP Paribas Investment Partners in 2008. He was previously global head of trading at Henderson Global Investors for five years, and prior to that spent more than 20 years at UBS, working both on the buy side and the sell side, most recently as regional head of Asia trading.

FX Week: Can you give an overview of your team's responsibilities?
Carl James (CJ): Dealing services came into being in 2006 and is now becoming part of BNP Paribas Securities Services. It is a state-of-the-art buy-side dealing desk, which allows institutional investors to outsource their dealing functions either fully or selectively. It is completely complementary to other outsourcing solutions offered to asset managers, such as back- and middle-office outsourcing. The integration of the trading desks of Fortis Investment Management accelerated the strategic plan and transformed what was essentially a Paris-based organisation into a global trading platform with desks in Tokyo, Hong Kong, London, Paris, Boston and New York.

FX Week: Do you have a specific growth target for 2012?
CJ: We have more than 35 clients, but that list is growing and we expect to double the business on the FX desk over the next six months. Our client base is quite varied in terms of their investment strategies, which means their activity levels are varied. We have clients that might be very active one month and then much less so the next. One particular client of ours in the credit space was very active and then went to almost no activity last month. Another client's activity has increased by 206% and another by 1,300%, while another client has decreased activity by 72%.

FX Week: Has the recent volatility in FX markets affected client activity?
CJ: In terms of products, we haven't seen a specific pattern over the past 12 months. On a monthly basis, we have seen a different preference towards spot, forwards and options, even if volatility has increased across all three products. This tells me that we have to keep track of what is happening in the market as a whole. On FX, our clients are a mix between active and hedging and they are not just currency houses. They are multi-asset houses, with various requirements around FX. We need to understand the asset classes in which we operate, and how our clients want to interact with the market.

FX Week: How do you expect new regulations on clearing and trading of over-the-counter derivatives to affect your FX dealing business?
CJ: At the moment, there is still too much that needs to be done before the regulation is written to make sensible conclusions. The final text of various regulations is still being negotiated and portfolio managers are not yet changing the shape of their portfolios deliberately. BNP Paribas is very proactive in this space, and we have various committees on regulation at each level of the business. In addition, I regularly sit with other buy-side houses to help shape the future regulation.

FX Week: Do you anticipate the regulations will necessitate changes to your technology and processes?
CJ: My opinion is that it is far too early to be writing cheques to buy new equipment for your desk for any specific regulatory changes. We are still in a time when you need to be engaged, but not necessarily making any decisions in terms of changing what is on your desk, assuming you have a good level of technology already.

FX Week: How do you monitor the regulatory process?
CJ: We have a number of priorities in the regulatory compliance process, mainly related to getting engaged in the debate, in terms of influencing and persuading. We have to engage with the regulators in the right way, and understand at what level to raise the dialogue. From the perspective of BNP Paribas Securities Services as a division, we aim to have a common vision on where we want to be in the new regulatory landscape and raise the dialogue accordingly. It is very much about engaging in industry forums, and being engaged with EU authorities. We regularly sit down with members of the European Parliament, and they are generally willing to hear the buy side's view. They have opened this channel of communication and we want to make sure we use it to represent the interests of the individuals who make up an institutional asset manager's end investors.

FX Week: When you talk about representing the interests of end investors, do you think the buy side is on a different page to the sell side in terms of its priorities?
CJ: We are starting to see where the European Union is placing its priorities – pre- and post-trade transparency appears to be the focus. This is a big hotspot for the sell side, for risk and commercial reasons. There is a big gap between the buy side and the sell side in terms of their point of view. This is interesting because different players want different levels of transparency, and the debate is now on how to calibrate transparency, not whether to have transparency in the first place. The sell side earns money from flows and turnover, and the more people trade, the better. At the moment, if the buy side trades on a principle basis, it wouldn't necessarily know how much the sell side is making. But pre- and post-trade transparency would allow you to make more sensible assumptions. As with anything, once it can be measured it can be managed, which should lead to a better outcome for our clients.

FX Week: When it comes to algorithmic execution tools, do you believe FX is following the model set by equities over the past few years?
CJ: We have been using algorithmic trading tools for around 18 months. It's quite interesting because we have already seen the evolution of algorithms in the equity world. They were fairly simplistic at the beginning and are now quite sophisticated. You can adapt them to your needs and make them more or less aggressive. FX has benefited from equities and those tools have been implemented in the FX world from other asset classes. So far, we have been pleased with their functioning and we measure the difference in execution, using tools such as implementation shortfall that give us a relative and absolute view. In current market conditions, a critical question is how to make execution for our clients more effective and more efficient. One way to achieve efficiency is certainly through the use of algos. Effectiveness is related to a trader's skills and to the technology they use for the benefit of the client.

FX Week: Do you use transaction cost analysis (TCA) to benchmark execution quality?
CJ: At the moment, we are not using TCA for fixed income in its broader sense. We use request-for-quote data, which at another level is TCA. However I view TCA differently: I want to understand if the trade was done at the right time, with the right broker and on the right venue. Best execution is not only about price, but also about process – skilled dealers, good technology, broker reviews conducted on a regular basis, good engagement with legal, and a strong understanding of how to engage with the market. I have seen many TCA providers in the fixed income and FX space, and it is somewhat reminiscent of early TCA for equities. They are less sophisticated models, but over time they will improve, particularly with post-trade reporting.

FX Week: What are the biggest challenges for the FX market in 2012?
CJ: Over the next 12 months, we expect to see changes in regulation, technology and the shape of the business as a whole. Politics will play a strong part in all those areas with the added dimension of elections coming up in the US and Europe, which could have an effect on the landscape, specifically regulation. Technology will also be an interesting driver in 2012. The technology doesn't need to be invented, as most of it is already in use in other markets; it just needs to be implemented.