Investment banking is in an extreme state of flux, and BNP Paribas is undergoing a deep reorganisation of its global markets division. Michael Watt talks to its head of global markets about mass production, cost pressures and the future of the industry. 

‘Industrialisation’ is not a word often associated with the inner workings of investment banks, but it is one that Pascal Fischer, head of global capital markets at BNP Paribas, frequently reaches for when discussing the future of his organisation and others like it.

“We need to be absolutely efficient in everything that we do,” he says. “Cost pressures are so high now that the good old days of revenue maximisation only are largely gone. Now, resource optimisation is the clear priority. As a consequence, we need to look at every product to see if it can be mass produced in a low-cost manner. We need to think more like industrialists rather than traditional investment bankers.”

Some of Mr Fischer’s peers might find his equation of investment bankers with production line managers at a widget factory rather bleak, or at least a little intellectually unsatisfying, but he is firm in his opinion.

“There will always be a need for new, innovative structures and landmark deals that make the front page. However, these sorts of things don’t happen every day,” he says. “There is a huge amount of thought and innovation going into building new products or redesigning old ones so they work in our current environment. We have to recognise that cost pressures and new regulation mean that some products are not viable in their current form. Investment banks cannot be everything to everyone everywhere anymore. We have to pick our battles. A more industrialised, automated business might be a little less glamorous, but it is absolutely critical to serving our clients.”

Team tactics

Mr Fischer also faces the task of making BNP Paribas’ investment banking services work within the wider, more diverse banking group. Deploying ‘low-touch’ electronic trading systems on a wider basis should allow clients in other business lines, such as wealth management or in corporate banking, access to the price-making capabilities and products of the investment bank.

To this end, BNP Paribas initiated a major reorganisation of its corporate and investment bank (CIB) last November. The firm’s securities and transaction banking services are being folded into the CIB, and Mr Fischer’s global markets team has been created within the structure to oversee a closer co-operation between the equities and fixed-incomes businesses.

The end goal is a completely cross-asset framework for global markets, a goal that is being pursued to varying degrees by other investment banks.

At BNP Paribas, this pursuit inevitably involves cutting away unwanted or duplicative systems as the equities and fixed income merge. “We are looking into every corner of what we do to promote client-centricity and improve efficiency,” says Mr Fischer. “We are intensively analysing and reviewing our front-, middle- and back-office process to find areas where we can make cost savings. This obviously involves a reduction in staff numbers as well as favouring the emergence of disruptive solutions, but we have to do this to keep pace with our competitors.”

For Mr Fischer, the endgame is to construct a single global markets platform where clients can take a look at products from all different asset classes, rather than have to go to individual asset class teams as before. “To the best of my knowledge, not many other banks have the ability to deliver products and services in this fashion. It will be a powerful asset for us. Building it involves everyone: management, individuals on the trading floor, in the back office. It is a very structured programme,” he says.

Traffic control

Part of this programme involved designing a new structure for the sales force. Though the lines between asset classes have intentionally become blurred, each still keeps its own dedicated sales team. As Mr Fischer admits, going cross-asset does not mean that specialists can be done away with in key areas such as G10 rates trading. In addition to these individual teams, more salespeople have been added, generalists with a bird’s eye view of the bank’s product range who can direct customers to the most appropriate team.

“This extra layer acts a bit like traffic control, making sure clients arrive at the right product for them, and cross-referring clients from one unit to another unit, or allowing multiple units to collaborate to produce something specific for a client,” says Mr Fischer. “By breaking down the individual asset class silos, we are better equipped than ever to engage with the buy side and improve their understanding of what we can offer. We are trying to be as product-neutral as we can in front of the client.”

If clients are to be presented with a leaner, more automated and more integrated service, the trick will be to figure out which products to industrialise. Some, such as spot equities and most foreign exchange products, are already firmly in the mass production camp. Other derivatives products, such as run-of-the-mill interest rate swaps or those based around credit default swap indices, may also get the automation treatment. Even highly structured products, such as those often found in equity derivatives, are being placed on the production line. Many banks have facilities where these highly complex instruments can be bought off the shelf in seconds through electronic platforms, with automated term sheets giving the client an immediate picture of what the product involves, cutting out the costly and time-consuming phone dealing that was traditional in the structured products market.

“There is no obvious dividing line between what can be mass produced and what can’t,” says Mr Fischer. “Sometimes even the most complex products can be packaged in a cost-effective way. Whatever can be rationalised will be, and there will have to be decisions over whether we want to continue offering some of what cannot. It’s important that we retain our commitment to providing a wide spectrum of products, but we have to do it in a smart, cost-controlled manner.”

The search for savings

To help make these decisions, the global markets team has a specially appointed ‘architecture’ group that is mapping out the structure and product range of the business. It is their job to root around in the guts of various asset class teams, finding cost savings and designing new systems. Much of this involves a great deal of heavy lifting from the IT teams, and global markets has a representative on the firm-wide IT executive committee to help bind the whole effort moving forward smoothly.

“We are on track. We have moved with great speed. Everybody is talking about global markets, and the new team has been put in place quite quickly,” says Mr Fischer. “The changes are filtering down very rapidly, and the new organisation is now effective. It’s not the end of the road, though. There is lots to do to address further challenges. We can’t rest on our laurels because the rules of the game are still changing, as are our competitors. We are generating high expectations through positive client results.”

With such huge changes hitting the investment banking industry over the past five or so years, there must be a strong temptation in the industry to believe that, sometime soon, the environment will return to an even keel, leaving banks to cope with existing regulation and make the best of the current cost constraints.

No further nasty surprises would certainly make the completion of BNP Paribas’ reorganisation a lot easier. The impact of higher capital ratios, a higher leverage ratio, higher liquidity ratios, derivatives clearing and a whole host of further market reforms and new operational requirements already make life difficult enough. Some banks have solved these problems by hacking the limbs off their market-making activities, drastically reducing their presence in some markets and leaving others altogether. Others have retained some skin in the game, but reduced the capital impact of trading by moving to an ‘agency’ model. This somewhat akin to that of an interdealer broker, where a trading desk connects buyers and sellers but puts very little of its own principal at risk. Société Générale has pioneered this approach in the foreign exchange market through its ownership of agency desk provider Newedge.

Mr Fischer believes further adaption of business models are inevitable in the short and medium term. “Everything keeps changing and I don’t see an end to that,” he says. “Are we going to continue with the hectic pace of new regulations? It would be nice to think everything will relax in a little bit and stop changing, but I think it is not a very realistic view of what is to come. We have to focus on staying agile, staying vigilant, and optimising our resources as best as possible.”

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