BNP Paribas' FX franchise recognised in four categories in the 2021 Best Banks Awards

Unrelenting investment in its FX franchise over the years has brought BNP Paribas to the forefront in many areas of the FX space

• Best bank for forwards/swaps
• Best bank for FX algos
• Best bank for Europe
• Best bank for sustainable finance

BNP Paribas has made great strides within the FX space over the past decade. The bank’s FX franchise has progressively gained traction over the years, leveraging its early success in the algorithm space to ultimately create a full FX suite for its clients.

In its ambition to provide a complete solution for its clients and become a comprehensive bank present in all markets and all areas, BNP Paribas has not shied away from stepping into the void left by other European banks. BNP Paribas’ most recent successes can be found in the forwards and swaps space, where the bank has invested heavily in a fully automated electronic book, and its foray into the world of sustainable finance has caught the eye of some of the market’s most sophisticated participants.

This year, the market recognised the bank’s efforts by honouring it in four categories of the 2021 FX Markets Best Banks Awards. BNP Paribas was voted best bank for algos, forwards and swaps, and sustainable finance, as well as best bank for Europe.

An area in which the bank has been particularly innovative is sustainable finance. BNP Paribas has long championed environmental, social and governance (ESG) initiatives. It was one of the first banks to be involved in the carbon emissions trading scheme launched by the European Union in the mid-2000s and, over the years, has expanded its involvement into other areas. The bank has pioneered ESG derivatives trading, initially on the equities side, before extending that to fixed income and, most recently, FX where it closed the first ESG-linked FX hedge in 2020. 

Levers of engagement

While sustainability issues are very much in vogue, BNP Paribas is cautiously manoeuvring within the space as it is keen to engage responsibly with the market and provide it with financing solutions that are truly sustainable.

“The growing focus on ESG is an opportunity for banks,” says Guillaume Picot, global head of corporate and investor commodity derivatives sales at BNP Paribas. “At BNP Paribas we take this responsibility very seriously. We believe it is our responsibility to make sure that everything we do in this particular area is not purely opportunistic, but actually contributes to a better world. At the very core, we consider it our duty to support a more sustainable world.”   

Translating this into actionable mechanisms within the world of derivatives requires the right level of ESG objectives that are both ambitious and credible for a particular transaction. To achieve this, BNP Paribas works with its clients to establish specific key performance indicators that need to be achieved in order to benefit from the discount the bank has outlined for that transaction. To establish their credibility, the indicators are derived from science-based criteria with the specific aim of encouraging market participants to maintain a high level of ambition.

“We want to ensure that the objectives only apply to clients who are rigorous and committed,” says Constance Chalchat, chief sustainability officer at BNP Paribas Global Markets. “In this respect, it is important for the conditional benefit on the margin of the transaction in question to be based on an indicator that is truly material and ambitious for the sector in which the company operates.”

Chalchat points out that, at present, the market participants that enter into ESG FX transactions are those that have already achieved a high level of sophistication in their sustainability plans and wish to leverage on sustainable finance to demonstrate their commitments vis-à-vis their investors or staff.

“Communicating to staff that a lower cost of financing can be achieved by doing right for the environment can be a very powerful motivational tool,” she says. “Linking employees’ everyday functions to material factors can be a strong lever of engagement within a company.”

While the sustainable finance space is undoubtedly nascent, Chalchat is confident that, once the sector does begin to take off, its growth will be exponential.

Taking a page from the spot e-book

BNP Paribas’ FX forwards business continued to perform strongly in 2021 on the back of the significant gains the franchise made during the course of 2020. The integration of its e-book with the voice desk before the Covid-19 pandemic-induced trading frenzy allowed the bank to consistently make prices throughout the crisis.

“One of the core reasons we were able to ramp up our market share of FX forwards volumes is predominantly down to investment in the e-book,” says Asif Razaq, global head of FX algo execution at BNP Paribas. “We took the ingredients we used to put in place a successful automated spot market-making platform and introduced these same concepts to our forwards and swaps e-book. By combining our pricing, risk management and hedging algorithms, we now have a fully automated forwards and swaps platform.”

The success of the e-book was particularly material in 2020 when the book’s algorithms were diligently pricing clients throughout the bouts of high volatility that rocked the FX market and the dislocation the industry experienced due to restrictive working conditions.

“In situations where there is a lot of volatility and market participants were dislocated – such as those we faced in 2020 – a machine can price more proactively and not be affected by issues that human traders may face,” says Razaq.

In addition to enabling more continuous pricing in the best and worst market conditions, BNP Paribas’ investment in its forwards e-book also enabled the bank to allow the book to take on bigger trades and to price longer-dated risk positions, which further compounded the success of the e-book.

“Investment in the e-book will definitely continue,” says Razaq, “particularly in the swaps space.”

“We’re starting to see the emergence of interbank FX electronic swaps venues, which are making swaps pricing available both to clients and dealer-to-dealer networks. The rise of these types of markets creates an opportunity for BNP Paribas to make prices on those platforms and increase our share of volumes in this space.”

While FX swaps have long been available to trade via algos, the depth of the market was often limited by the capacity of the algo provider’s swaps desk. This remains the case today to a large extent, but the emergence of non-deliverable forwards – which are swaps in themselves – and their swift adoption by the market means that an increasingly larger share of this FX derivative is gradually being sourced from the market and no longer solely from a bank’s swaps desk.  

“As an active algo provider, BNP Paribas is very keen to connect into these emerging electronic swap platforms,” says Razaq. “Providing our clients access to the marketplace where they can source the best prices gives them an appropriate mechanism with which to prove best execution when trading swaps.

“Our algo desk is also quite keen to trade on those platforms because we see it as a complementary service to our current swaps business. We are eagerly watching this space as we see it as the next big shift in the algo space.”

While swaps trading gathers pace within the algorithmic arena, BNP Paribas is cognisant that it must also continue to scrutinise the markets in which it already transacts. In its most recent surveys of those markets, the bank has identified information leakage and market impact on electronic communication networks (ECNs) as a particularly topical issue as the number of high-frequency trading firms have become increasingly involved on these type of lit venues.

“As soon as we show interest in those markets, the algos of high-frequency trading firms will essentially be listening to the market data,” points out Razaq. “After detecting an active algo order, they are able to use this information to their benefit.

“We’re trying to address this by taking a step back and being smarter about how we interact with the market.”

As a result, BNP Paribas is experimenting with the concept of utilising hidden orders, where the bank can essentially post its interest on an ECN without those orders showing in the order book.

Looking out for liquidity

In parallel, the bank has also been looking for more intuitive ways to source liquidity within the bank. One that has proved its worth is BNP Paribas’ increasing use of its internal exchange BIX (BNP Internal Exchange), in which different counterparts within the bank are proactively brought together to see if any offsetting interests can be matched off against each other.

“The result has been astounding,” says Razaq. “Whereas our mid-matching ratio in BIX was around 8–10% in the past, with the investments we’ve made in the exchange we are now approaching 30–40%, a significant increase in the proportion of orders sourced from mid-matching. As a result, we’ve noticed a significant improvement in our algorithms’ liquidity sourcing because we’ve been able to minimise market impact.” 

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