The idea of consolidating equities and fixed income financing desks seems like a logical strategy for banks to use their balance sheet more efficiently, but for clients the results may not be that obvious. In this article, I will talk about Natixis’ recent moves towards desk mergers and how we are already seeing clients receive improved and more innovative services.
Something had to be done. Regulatory constraints and market changes meant that business as usual would no longer support distinct trading desks for equity finance, including index trading; and fixed income repo and financing solutions, including governmental, supra, credit and emerging bond markets. The traditional approach has been a rigid separation between the two asset types; but today’s strategy looks different, and benefits for balance sheet optimization increase measurably by looking at the desks as one unit.
We decided to merge our financing desks across fixed income repo and financing solutions with equity finance in Q2 2017, creating Global Securities Financing (GSF). This covers two major banking activities: repo/stock borrow loan (SBL) on the one hand and securities financing solutions on the other. We are now starting to see the tangible benefits.
While a desk merger was a smart decision for us, where does it leave our clients? One could think that with a merger, clients would lose our attention as a result of the bank’s internal focus or streamlined resources. It is a legitimate concern and one that we considered carefully. If we merged the desks, would clients see a difference in service quality? Would we treat them differently, and if so, would it be to their benefit? This was a primary consideration when looking forward to what an improved financing business should become.
The biggest problem we faced prior to the merger was that clients didn’t always care what desk they were speaking with, but rather wanted solutions that would meet their needs. Certain clients understand in advance that an equities financing desk would provide an equity-based solution, and similarly for a fixed income financing team. Others however just want the job done: they have a constraint and want a solution, regardless of whether they know what the products and services are that one individual financing desk can provide. When a Natixis representative could meet the client’s needs, it was a good fit. But equally, a Natixis team could run into obstacles presenting equities when really the fixed income group was required, or vice-versa.
With our newly merged desks, we are finding a reinvigorated conversation with our clients in discussing our firm. We have surmounted the conversation about different asset class specialties with one activity that can cover a variety of products, including cash, derivatives, financing and solutions. This has led to both new products and new opportunities with our clients.
Solving the client need
Many clients come to Natixis because of our expertise with derivatives. Even though we do not offer a full prime brokerage service, we have developed a cross asset synthetic prime brokerage offering, and our historical experience with derivatives makes us an ideal partner for Tier 1 and Tier 2 clients worldwide. The combination of our merged desk and our derivatives expertise allows us to engage in new product solutions for clients. Here is one example where we have focused on the combination of Basel III requirements and negative interest rates:
- Money market funds backed by repo for cash investors are concerned about negative rates. With the European Central Bank’s current deposit facility rate of -40 basis points and other European countries with negative rates, cash investors face difficult choices of where to place their cash.
- Collateralized notes structured by Natixis require no contract or credit line. This is similar to a purchase of any asset-backed security, and money managers can include these notes in their funds regardless of the underlying collateral type. This offers flexibility for managers looking for the structure of a fixed income repo transaction but the yield of an equity repo, or similar asset types. It is also a bankruptcy remote product in a segregated account. This can be of benefit to our direct clients or the clients of other banks where cash is viewed as unattractive to hold in accounts or on the balance sheet.
- Full transparency of the type of collateral in any of the segregated accounts. This was a big data challenge that we can now deliver to clients across asset classes for a variety of risk management, regulatory and portfolio management purposes.
Over time, we also think that the merged desk approach will help clients in fixed income see that equities might be a helpful risk diversification, and vice versa. Recent volatility in fixed income has upended some long-held views about the stability of that asset, while calm in equity markets may leave volatility investors looking at fixed income for trading opportunities. The ability to speak across equities and fixed income at the same time leads to greater client education and ultimately benefits the investor.
Our constraints and what we’ve learned
Like other major banks, Natixis is bound by capital ratios that assure us and our clients that we are carefully managing our risk. This is the new normal. And like other banks, this means a turn towards longer-dated transactions and careful attention to risk-weighted assets and balance sheet exposure.
With our combined vision across fixed income and equities, we are optimizing a flow business with substantial volume at small sizes, and a special situations business focused on dynamic product creation. The merged group is expanding its domain to consider the creation of hybrid products with a fixed income leg, an equities leg and built in financing. This had been theoretically possible before but separate desks made it difficult to get the actual job done.
The creation of a merged desk at Natixis has led to optimization, not just for us but also for our clients. The siloes we had built up across operations, technology, people and processes are now coming down. Concurrently, we now have a more transparent overview of exposures and assets. Since analysis and settlement go through one system, we and our clients can see on a bigger scale than before: what is happening, what has been processed and what still needs to be completed. This efficiency does not yet extend to our front-end trading systems across fixed income and equities, which will be our next project in the coming months.
A cooperative industry
As we build our Securities Solutions approach to the GSF team, we have also grown our cooperative outlook on the industry. We think that working proactively with clients, counterparties and service providers to develop new products creates the healthiest business environment. We have recently found ourselves supporting clients with operational processing solutions and recommending service providers more often than usual. As securities finance across products continues to face a range of regulatory hurdles, the capital markets industry must work together to figure out solutions and solve emerging challenges. Our merged financing business brings together our greatest strengths to one team, giving us one view across equities and fixed income financing business activities. We expect to further leverage this expertise to support a robust securities finance and structured products landscape across the industry.
Christophe Bensoussan is Global Head of Global Securities Financing at Natixis. He is responsible for developing bond and equity finance activities, including repo, collateral management, index trading and solutions. Christophe has spent more than 20 years in capital markets, including 14 years at Natixis. Previously, Christophe was Global Head of the Securities Financing Group within the Natixis Fixed Income activity.