FX Markets Best Banks Awards 2020: Best bank for FX algos, forwards and swaps, and Europe – BNP Paribas

Despite the uncertainty wrought by the Covid-19 pandemic, BNP Paribas‘ history of sensible decisions has allowed it to thrive among the chaos through initiatives such as its interactive algo trading assistant Alix, which allows users to speak and receive commentary in real time from home

The investments made by BNP Paribas in its drive to broaden its FX franchise in the years prior to 2020 equipped it well to not only weather the storm that unfurled during the course of the year, but set the bank on a solid footing to increase its market share in the FX industry.

While the bank witnessed a surge in FX forwards flows in its electronic book and record volumes of algos on its platform amid strained liquidity conditions in the market, it also ventured into uncharted waters with the very first ‘green’ FX forward traded on its single-dealer platform.

The bank has long championed environmental, social and governance (ESG) within its operations, and pioneered ESG derivatives – initially on the equities side. With the nascent development of ESG derivatives in fixed income, BNP Paribas has naturally taken a leadership role, closing the first ESG-linked FX hedge in 2020. 

“The way we see this market developing meaningfully is through close partnership with clients over the long term,” says Xavier Gallant, co-head of interest rates, FX and local markets corporate sales for Europe, the Middle East and Africa (Emea) at BNP Paribas. “It’s essential to calibrate our solutions around each clients’ ambitions, and define how we measure their success from the start, which also ensures the sustainable impact is clear and tangible. This is a bespoke approach – the market is by no means commoditised.”

In the case of the first contract, BNP Paribas’ client wanted to enter into a green FX forward linked to a wind-farm project in Asia. The bank worked closely with the client to establish a contract that would be connected to specific key performance indicators (KPIs), the outcomes of which would be used to calculate a premium added to the rate of the FX forward. 

“The mechanism we created sees a premium linked to this contract calculated on a yearly basis,” explains Gallant. “If the ESG KPIs are not met by the client, they pay a premium that BNP Paribas invests in a reforestation project in the client’s home country.”

The central tenet of this new type of FX contract is to combine transparency and impact in the use of funds that meet a set of sustainable criteria. Gallant points out that the clients most likely to be interested in such transactions are typically sustainable businesses that want to uphold a measure of sustainability in their hedging or corporates with strong sustainability conviction, who want to bring a sustainable hedging overlay to their operations.

Since that very first client, BNP Paribas has facilitated other ESG-linked FX forwards trades, many of which were linked to specific and long-dated projects. And, given the success with FX forwards, the bank is now in discussions with clients on how this could be extended to other types of transactions or other frameworks.

“Our commodities business has been working very closely with the FX business since they’ve been helping clients conduct carbon offset trades for many years now. The structuring team is working closely together to come up with solutions,” says Neehal Shah, global head of Group of 10 FX trading, and Emea head of FX and local markets institutional sales. 

He suggests one possibility could be to provide clients with a choice of liquidity providers that fall within ESG guidelines that they have set instead of particular projects. 

“On the execution side, clients could choose liquidity providers based on their own criteria and their own underlying principles,” he says. “There’s no reason an algo couldn’t be set up to only trade with liquidity providers that have signed up to an ESG protocol.”

The solutions remain a work in progress as the bank weighs its options. It prefers to tread carefully and establish a sustainable business with a long-sighted vision rather than go to market quickly with an unrefined solution.

“This is not a short-term, volume game for us,” says Gallant. “It is about developing sustainable partnerships to help our clients achieve their long-term ESG objectives.”

Internalisation is key

BNP Paribas’ wider FX forwards business also made significant gains in 2020. It naturally benefited from the Covid‑19 pandemic-induced trading frenzy, but its co-ordinated risk approach across all jurisdictions and the integration of its e-book with the voice desk allowed the bank to consistently make prices throughout the crisis.

“We were there for our clients as liquidity in the market deteriorated,” points out Adrian Hudd, global head of G10 FX swaps trading at BNP Paribas. “We stepped up for our clients and ensured minimal disruption to their business needs.”

He concedes that the events of 2020 contributed towards the doubling of average daily volumes during the course of the year. However, he explained, the main driver for this momentum was the introduction of global books and the bank’s FX forwards electronic book being merged with its voice trading desk at the beginning of the year. 

BNP Paribas’ continual presence in the forwards market during the toughest liquidity conditions of 2020 propelled the bank to feature repeatedly among the top three liquidity providers on the major multi-dealer platforms, says Shah. 

“The foundation is years of investment to set up the infrastructure of the electronic trading book, both on the pricing and risk management fronts,” he says. “The pandemic accelerated the need for automation, and those banks that didn’t make that investment started falling away. This allowed us to move up the rankings quite dramatically.”

The key to the success of the bank’s forwards franchise is the balance of flows between corporates, real money and banks, and, perhaps more importantly, internalising 90% of these flows.    

“What has made our business successful is internalisation of flow,” says Shah. “The key is to achieve scale. The more client trades that are offset against other clients and the larger the portfolio of trades and currencies, the easier it is to remain risk neutral without having to go to market and lose the bid/offer spread.” 

Making life easier for traders

Long regarded as a pioneer in the algo space, BNP Paribas made significant headway in 2020 with major progress achieved in integrating its algo suite into their clients’ workflow.

“The biggest problem with deploying dedicated solutions is integrating it into a client’s day-to-day workflow,” explains Asif Razaq, global head of FX algo execution at BNP Paribas. “Our biggest clients are already well integrated with well-established third-party order and execution management systems.”

Since many of its clients are limited to using these systems – and are thus unable to use the bank’s algo suite directly through its single-dealer platform – the bank came up with the idea of developing an application that could be launched within the Bloomberg ecosystem and interact directly with those third-party platforms in that sphere.

“Clients can now submit their BNP Paribas algo orders through their platform and these magically appear on our app where they can manage their orders and use all of the value-added features,” says Razaq. “And it’s fully compliant with clients’ internal policies and approved channels.”

In addition, to enable even more clients to have access to BNP Paribas’s single-dealer platform Cortex, it has made it available within the OpenFin desktop environment as well as providing access to certain functions of its platform via application programming interface.

But the key delivery for BNP Paribas in the algo space in 2020 was the launch of the interactive algo trading assistant Alix, which was so well received that, even before its first birthday, new features had already been added to it.

The idea behind Alix was to provide market participants with an assistant that would guide them through the execution of their algos, communicate with clients and respond to their queries on live trades or the markets.

“That’s the type of commentary and market colour clients normally get from a trader, and now they’re getting it from the machine,” says Razaq. “The machine is using huge datasets to come up with conclusive answers because it not only looks at just one or two markets, but at the entire FX ecosystem. All in under a second.”

With most market participants forced to work from home at some point through 2020, this interactive feature proved very popular – so popular, in fact, that Alix’s scope was quickly extended to all FX trading functionalities within BNP Paribas to become a trading assistant on all things FX at the bank.

“The idea behind Alix was to give clients that comfort factor,” says Razaq. “What really surprised us was how interactive clients were being with Alix. Since its launch, Alix has been asked 100,000 questions.

“In a year where where it has been more difficult for people to be in touch with their sales and trading community, having a tool at home with which they can speak and get back commentary in real time is making them a lot more efficient in their day-to-day schedule.”

“Originally, Alix was prioritised for pushing information to clients, but we never expected clients to pull so much information from Alix.” 

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