BNP Paribas’ head of equities and commodity derivatives for the Americas explains the machinations involved in the firm’s recent purchase of Bank of America’s equity prime brokerage business.

When BNP Paribas announced that it was buying Bank of America’s equity prime ­brokerage business in June, which had more than 500 hedge fund clients, Todd ­Steinberg, the bank’s head of equities and derivatives for the Americas, hit the road. “Prime brokerage is a relationship business,” he says, “so I personally visited the top 75 prime brokerage customers to explain what the merger was about, why they were ­important to us, what new services we could bring.”

The result was pretty dramatic. In the four months between when the deal was announced on June 9 and the merger closed on September 30, the run rate of the prime brokerage business grew by 30%. When the deal closed, the bank executed share orders for more than half of its brand new prime brokerage clients the very next day and two-thirds of those that used listed options also did options trades that day. “It was way beyond our expectations,” he says.

In fact, Mr Steinberg had been involved in the French bank’s search for a traditional equity prime brokerage business in the US since he joined the firm in September 2005. BNP Paribas already had a synthetic US prime brokerage business, but wanted to offer its leading equity derivatives platform to a wider client base, so started to consider the options three years ago.

Brokerage shopping

It ruled out building a domestic presence from scratch, given the hefty infrastructure commitment and the fact that clients do not switch prime brokers easily, so it started assessing what it could buy. “We’d been ­looking at prime brokers, large and small, but we couldn’t find anything suitable,” he says, “but when Bank of America’s became available, it was clear from the beginning that it was the perfect fit.”

For a start, the staff there worked in a bank, not a brokerage, and understood a bank environment. Its client base was also complementary. Bank of America’s unit focused mostly on long/short equity; the international prime brokerage unit at BNP Paribas did most of its business in multi-strategy. “We had the multi-strategy clients with $5bn or more of assets under management and it had the $750m to $5bn long/short guys,” says Mr Steinberg. BNP Paribas could also offer international equities execution in 55 countries and a full service derivatives offering to Bank of America’s prime brokerage clients, neither of which they had already.

Plus, Mr Steinberg used to work at Bank of America in equity derivatives. “I knew the prime brokerage business there intimately and I had always been impressed with it. It had always been a profitable, professionally run business, which was very selective about its clients. Having had that internal insight, it was an easy decision.”

There have certainly been some dramatic changes to the competitive landscape in US prime brokerage specifically but also in equities and derivatives generally since the Bank of America deal was sealed. Bank of America has had a change of heart and took on another big prime brokerage business with its acquisition of Merrill Lynch. Barclays Capital is suddenly a big equities and derivatives player after acquiring the Lehman Brothers North American investment banking business. A combined Wachovia and Wells Fargo could also have more clout.

Mr Steinberg says he is not phased by any of that. “Without being specific to any particular institution, when a firm exits a business, it is often very difficult to get back in, and for banks that have gone bankrupt and hedge fund clients that are still trying to get their cash out, I think it is very difficult to rebuild trust.”

Another major issue is that the number of potential hedge fund clients in the market is shrinking, with some closing operations altogether. Other prime brokerage clients will be forced to delever. Yet, Mr Steinberg thinks that will be a bigger problem for larger, established prime brokers that are defending their existing market share.

He argues that those prime brokers that offer relative security are still going to attract new business. He points to the fact that BNP Paribas is now the only AA+ prime broker in the US and that, on the day of the interview, the bank’s five-year credit default swaps were trading at +60 basis points (bps). At that point, Morgan Stanley’s were trading at 875 bps. He thinks that independent broker dealers will continue to have problems when they have to rely on inter-dealer credit as a source of funding. On the other hand, those in universal banks, and, in particular, universal banks that have remained relatively stable throughout the credit crisis, should win the day.

Cautious management

This is not a surprising view, given that Mr Steinberg goes to work at a major universal bank every day, but he has worked at big broker dealers in the past too. “On a personal level, I am very sympathetic to the plight of many of our competitors, but our corporate and investment banking operation has remained profitable and the company has been run conservatively from a risk perspective,” he says. “Our reward is that in this changing landscape, we have become the counterparty of choice in many of the businesses where there is credit risk, including over-the-counter equity derivatives, prime brokerage and synthetic prime brokerage.”

Continental reach

Indeed, other parts of the bank’s equities and derivatives business in the Americas have shown solid growth. And net income has tripled there in the past three years, partly as a result of ongoing efforts to build out equity derivatives in the region. “If you want to be the global leader in equity derivatives, you certainly need to be a leader in the Americas too, which represents about 40% of the global revenue pool,” he says. He adds that equity derivatives in the Americas are having a record year, stressing that the exceptional market volatility is a plus for flow-related areas of the business, such as listed options because people are taking short views.

BNP Paribas has also been expanding in Latin America, where it has a full service equities derivatives platform, opening an equity derivatives business in Buenos Aires and adding two people in São Paulo. “We also hired a number of people in New York covering Chile, Mexico and central America and greatly expanded our calling effort [in the region],” says Mr Steinberg. “The equity derivatives business has doubled for us in two years down there.”

Aside from over-the-counter and listed equity derivatives, synthetic prime brokerage and now traditional prime brokerage, the equities and derivatives business provides equity execution in 55 countries for clients in the Americas. The bank does not have a full-service equities platform in the US, but the execution business is still growing, not least because of share orders from the new prime brokerage clients. “Given the economics of equities in the US, the full-service model is very difficult to make profitable but the execution model is very profitable,” says Mr Steinberg.

It also has a structured products business. He points out that its most successful structured products recently have been those that are market-neutral, relative value trades, which are not so influenced by what happens in the wider equity market, but the group has also been executing plenty of pure volatility trades for clients – long volatility in certain sectors and short volatility on equity indices, for example. However, he points out that in the current economic climate, it pays to be able to adapt quickly. “We’ve got 110 people globally in our structuring group that focus exclusively on product development. In a market such as this, we can adjust our product mix much more easily.”

Commodity derivatives, which now focus on oil, natural gas, metals and softs (food and fibres), have also been brought into the business. The combined effect has been that the group, which was 85 people-strong when Mr Steinberg arrived from Wachovia, now employs more than 400 ­people, including Bank of America’s former prime brokerage team.

It is an enviable position to be the regional head of one of the biggest revenue engines at the bank, particularly given BNP Paribas’ global reputation for equity derivatives, which has placed that market firmly at the centre of the bank’s corporate and investment banking strategy.

“Baudouin Prot and Jacques d’Etais really understand the equity derivatives business. There are not many CEOs in the world that do,” points out Mr Steinberg. “When you have senior leaders like that, and my boss, Yann Gerardin, it is a very supportive place to be. This is an environment where we can get a lot done.”

Organic growth

Mr Steinberg says one of the next steps will be to make more hires in prime brokerage. “The business has grown so rapidly since we bought the Bank of America platform that we’ll need to invest more resources in that.” He adds that there will be more hires in commodity derivatives and that continuing the expansion in Latin America and entering new countries there will also be a priority. “But there won’t be any big, bold brush acquisitions this time. We’ll just be growing organically to reflect the growth in our market shares.”

He has had a big hand in the changes made in the business in the past three years, even though he still characterises himself as “very much the new guy”, because many of his executive committee colleagues have been at BNP Paribas for 15 years or more. And he has obviously been enjoying it.

“We’ve got some very smart people but we are not hierarchical and we’re a modest group.” And serving on the global equities and derivatives executive committee, which includes people from all over the world, has been interesting. “I’ve also enjoyed the international culture. We have a global perspective on things and the world is correlated. I think we finally all got that.”

CAREER HISTORY

Todd Steinberg

2006: Appointed head of equities and commodity derivatives for the Americas, BNP Paribas. Member of the global equities and derivatives executive committee, co-head of the division’s regional management committee. Member of the bank’s ­territory management committee for the Americas and on the board of the BNP Paribas Securities Corporation.

2005: Joins BNP Paribas as deputy-head of equities and derivatives in the Americas.

2000: Founds and heads up equity-linked products business at First Union and subsequently Wachovia Securities. Member of the operating committee and board member of Wachovia Capital Markets.

1994: Holds senior equity-linked positions at UBS, Bear Stearns and Bank of America.

1992: Begins working at Morgan Stanley in the bank’s ­equities division.

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