The FX- Factor

BNP Paribas' Eric Auld & Francois Boisson explain why, for some, the financial crisis was a great opportunity

What does the job of foreign exchange trader involve?

EA: There are many different kinds of traders in our department. We have guys who trade spot FX, there are people who trade forward FX and then there are people who trade more complex derivative structures. In all these jobs we're market making to customers. Clients come to us to buy or sell a different product. We also suggest deals to clients.

What skills do you need to be a good FX trader?

EA: You have to have a certain affinity for risk. At the moment there's a lot of bad publicity in the news. People say derivatives trading is gambling. It's not. But there is an element of uncertainty. Being a good trader is about making decisions in the face of that uncertainty. That means being able to analyse a lot of different data. Much of that analysis can be quite complex. So there is a demand for people with an engineering background. The analytical skills are important but so too is an appetite for making those decisions despite the uncertainty. That requires an ability to control your emotions. You can't be greedy and you can't be afraid. When the markets are full of greed or fear, that's when there's an opportunity for someone who can remain cool.

What does FX sales involve?

FB: The sales job and the trader's jobs are fundamentally different. On the sales side our mandate is to build relationships with clients. We offer advisory services, market information and analysis to clients. We aim to generate interest on their part and be rewarded through more business.

How does that work in practice?

FB: I'll give you an example of how we might advise a client. In 1999 Vodafone, a UK based company with the bulk of its revenue in US dollars made a huge acquisition, the biggest in history, of Mannesmann, which is a German company. The deal was worth over 100 billion euros. Vodafone would have had a huge currency exposure. Part of the complexity of that deal was the hedging of the foreign exchange. Hedging over a hundred billion euros worth of euro/sterling exposure is not easy for anybody. It's too big for the markets to digest in one go. You would use a number of solutions. They might include using derivatives or average rate options. You might average the purchase of the euros and the sale of sterling over a certain period in order to reduce volatility. As soon as the news became public there would be a rush to buy euros and sell sterling in anticipation of the huge M&A flow, which would massively increase the cost of the deal. In this example the bank can act as an advisor to the company, designing a strategy to minimise the costs.

Why did the FX markets see an increase in activity after the collapse of Lehman Brothers?

EA: First liquidity disappeared, which meant a lot of people just didn't want to play anymore. Central banks cut interest rates to zero. Stock markets crashed. A lot of people had to rebalance their portfolios. This created a lot of forced activity. People had no choice but to trade in the FX markets. For example, many people had to liquidate their stocks in one currency and repatriate the money back into their home currency. Another example: a lot of people were borrowing money in US dollars because it used to be cheap to do so. Those markets disappeared. Suddenly people had liabilities in US dollars they just couldn't fund. The only way to meet these liabilities was to take money out of their home currency and buy dollars. Another thing that happened was people had their risk limits cut. Most people who use leverage when they trade have a limit on the amount of money they can lose over a given period. Generally it's set by the people they work for. Last year a lot of people were told to reduce their risk. In addition, because the way many people measure the risk of a portfolio is linked to market volatility, the same position looked riskier in October of last year than it did January. Many people had to reduce the size of their portfolios. All these different factors created a huge amount of action in the FX market.

FB: The potential knock on effect of the collapse of Lehman brothers forced clients to rethink who they were banking with and to become a lot more conscious of what we call counterparty risk. We've seen banks suddenly downgraded a number of notches by the credit ratings agencies. Some commercial banks, of which BNP Paribas is a good example, have benefited from there being fewer actors for the clients to engage with. We've managed to weather this crisis with our double-A credit rating in tact. Today that's an immense luxury and a huge differentiator when it comes to attracting business.

How did the bank manage to keep its credit rating so high?

FB: The big difference between commercial banks like BNP Paribas and the investment banks is that we have less concentration in the pure corporate investment banking business. BNP Paribas has more than 200,000 employees in 88 countries. So it's very large. It's involved in retail banking, asset management services, corporate investment as well as consumer finance. I think the crisis showed that institutions with diverse revenue streams and large cushions of cash from retail clients are the strongest during financial storms.

EA: We didn't put all our eggs in one basket and we tried to stay away from the bad baskets. We did a fairly good job at avoiding the bad baskets.

Is the FX market going to get more competitive?

EA: There will be an increase in competition because a lot of people noticed FX was one of the most resilient businesses. At the same time a lot of competitors have been weakened. Perhaps they've had major losses, the government may own part of their stock, maybe the management are unable to focus as much on competing in this market as they had in the past. So we think there's an opportunity for us and we're expanding aggressively in FX. This year we're hiring in certain areas. In particular, we're expanding our real money sales force, which deals with insurance companies or pension funds. Some of these clients were overbanked in the past. Everyone was dying to do business with them. Now a lot of our competitors have gone and clients realise they can't only use one bank. It's always better to have two or three counterparties. BNP Paribas has a very strong balance sheet. They want us and we need them. So we're expanding our sales force to focus on that kind of client.

FB: Our sales force is meant to register some 200 additions over the next two years across all the asset products and geographies. 15 percent of that will be in FX. That doesn't include the natural turnover of people. We want to increase the ratio of sales to traders because our business model is centred around the client. We're not in the business of building huge proprietary positions and hoping the markets go our way. We want to be there for the long term. We want to build our brands, our relationship with clients. To do this we need more people.

Do you think it's a good time for graduates to go into FX?

FB: I meet quite a few graduates every year. I must say it's been hard to convince them that, although it's been through a bad crisis, the financial industry is here to stay. The system's been cleaned up. Excesses have been identified and wiped out. Some institutions have emerged from the crisis a lot stronger than they were before. Finance is an extremely agile and rapidly evolving industry. So, yes, it's a good time because we're at the beginning of a new cycle, which I feel is going to be a bullish one for the industry.

EA: And people will always need to trade foreign exchange.

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