Natixis is confident that merging its equities and ﬁxed income ﬁnancing desks in its securities financing businesses has increased its capacity to implement solutions that meet complex client requirements.
In early 2017, Natixis’ Corporate and Investment Banking found itself at something of a crossroads in terms of its financing business. The business was in good shape financially. The results had just revealed a 28% increase in 4Q16 net business income for its global capital markets business, driven by a 20% rise in fixed income revenues and a 47% increase in revenues from equity (vs 4Q15).
However, a combination of regulatory constraints and market changes had placed considerable pressure on the conventional structure of maintaining separate trading desks for equity finance and fixed income secured funding, which include governmental, supra, credit and emerging bond markets.
While this approach was well established across the banking sector, it was becoming increasingly clear that traditional ways of doing business were no longer fit for purpose. Analysis of the way the desks were operating revealed the potential for considerable balance sheet optimisation by viewing the equity finance and fixed income secured funding desks as a single entity.
An alternative approach
Therefore, the decision was taken to merge the ﬁnancing desks across fixed income repo and ﬁnancing solutions with equity ﬁnance in the second half of 2017, creating a new entity called Global Securities Financing or GSF to cover both repo/stock borrow loan and securities ﬁnancing solutions.
“There are very few desks that have a solutions team covering both secured funding and equity finance”, says Romuald Orange, global head of client strategy group in GSF at Natixis. “You usually find the solutions team in the equity derivatives book or in the advisory team of the fixed income.”
One of the most important elements of the GSF group is the solutions team, he continues. “This is the essence of GSF because that is where we have maximum flexibility and capacity to use any of the different tools used by the other parts of the group and package them into a wrapper that is either investible by our clients or will finance a position.”
This is a real alternative to the approach taken by other banks in that Natixis has the capacity to engage clients in project mode when they come to the bank with a specific request.
The group includes experts on pricing and refinancing as well as specialists in client management and product development. GSF’s Solution team’s core focus is finding answers for clients and the group emphasises teamwork, innovation and leveraging on experience. This is helped by the fact that its people have been working together over a number of years.
“We were fortunate to be able to find people with the necessary skills and expertise already working in the bank for both fixed income secured funding and equity finance, most of whom have many years’ experience,” says Ian Beattie, head of client development – Europe/UK.
“The merger of these teams has enabled Natixis to multiply the value of this expertise and the maturity of the team enables the bank to identify potential bottlenecks before they become a problem,” he adds. “The fact that we have dedicated product and client specialists not running a book themselves gives us a higher level view of the various aspects of the business.”
GSF is a key step for the bank in terms of optimising assets, getting the right people working together and gaining efficiencies in terms of flow business, collateral management and bringing on platforms.
Solving clients specific requests
“The solutions group is the response to tailor-made requests from clients, so it made sense to create a dedicated workforce within the GSF team to handle such specific requests”, says Orange.
“We were also careful to ensure that merging our equities and ﬁxed income ﬁnancing desks would not impact negatively on client service,” he continues. “In some cases, internal restructuring can lead to a loss of focus on clients and/or a reduction in the resources devoted to client service. This is the exact opposite of what has happened with this merger and the impact on client service levels has only been positive and materialized by the increase of client orders”.
In fact, creating GSF has further enhanced the conversations Natixis is having with its clients, enabling the bank to replace multiple interactions about different asset class specialties with a streamlined approach that can cover a variety of products, including cash, derivatives, ﬁnancing and solutions in both equity and fixed income markets.
“Many clients come to Natixis because of its expertise with derivatives,” observes Beattie. “We have developed a 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 example, the merged group is considering expanding its domain to include additional assets in its prime brokerage offer.
Romuald Orange notes that the regulatory landscape was one of the key factors behind creating GSF. “Higher volumes of reporting and regulation were a daunting prospect initially, but increased investment in technology has enabled the provision of tools that give us a level of granularity on our portfolios - whether that is equity or bonds – and how the client is handled within the bank,” he explains.
This is an example of the positive impact of regulation. It is not just pushing people to be more transparent – it is also ensuring that resources are made available to improve pricing for clients. The regulatory conversation has moved from compliance to increasing efficiency and Natixis has the capacity to secure resourcing for future developments.
New solutions and new opportunities for clients
“Although GSF is still relatively new, it has performed a number of transactions that as standalone desks were not able to be traded,” explains Orange. For instance, a client holding government bonds from euro-peripheral countries but looking to transform their currency exposure via repo in another currency came to the bank. Thanks to its expertise it managed to find a way of meeting the client’s needs by creating a structure that was not impacting its balance sheet.
“This is an example of how the formation of the GSF team has already created additional opportunities for our clients,” adds Orange.
“Our collateralised notes program has also benefited from the merger. Another round of transactions has been executed lately, for significant sizes, with new investors that could not access the product in the previous organisation. We continue to innovate by opening the product to new assets and new counterparties, hence multiplying the opportunities and ideas for our clients.”
Orange describes solutions as the driver of GSF. “It is in our DNA - where others see constraints we see opportunities, and the team is often working under short time notice to find the right setup. Another good example of the team’s expertise is its ability to monetise illiquid assets, which can now be replicated for almost any kind of underlying for the benefit of our clients as we offer higher spreads than for traditional securities financing transactions.”
When attending the Clearstream Global Funding and Financing Summit 2018 in Luxembourg at the end of January, the Global Securities Financing concept was very well received – Beattie describes it as a ‘prick up your ears’ situation for many counterparties.
“It looks like it made sense for a lot of the audience,” he says. “The ability to speak across equities and ﬁxed income at the same time leads to greater client education and ultimately beneﬁts the investor.”
As for how GSF is likely to develop over the next few years, Natixis expects the merged desk approach to help clients rationalise their investments and refinancing axes across the different asset class with the help of the solution team.
Orange also predicts a continued shift in the business model towards fee-based remuneration where the bank is rewarded by its clients not only through getting a spread out of a transaction, but also being able to have clients remunerate its ideas.
“This is a new concept and one that will enable us to continue to find solutions to client requirements beyond the standard product set,” he concludes. “Repo and equity finance are often viewed as vanilla products that anyone can understand, but we have added an additional level of sophistication that is not usually found in such products.”