LONDON, July 12 (IFR) - BNP Paribas has struck an agreement with ING to acquire risk relating to a €5bn portfolio of structured notes issued by the Dutch bank.
The deal sees ING transfer risk from complex equity derivative products and associated hedges to BNPP through a series of trades. The deal will also see BNPP service around 250 structured notes on behalf of ING, according to people familiar with the agreement.
The first transfer has already taken place and the deal is scheduled to complete by year-end.
A spokesperson at ING confirmed that BNPP was selected in May for a deal that includes a risk transfer of products and hedges and a joint exercise to novate over-the-counter trades in the portfolio. The bank declined to confirm the size of the portfolio or other details relating to the trade.
A BNPP spokesperson also confirmed the deal but did not confirm additional details surrounding the size of the trade.
The arrangement is the latest sign of consolidation in the ultra-competitive structured products market. Post-crisis reforms including stringent capital rules have heaped additional costs on structured products businesses, which have also been hit by low rates and a flight from complexity.
While smaller players have retreated, larger firms that have been able to reduce costs with fully automated platforms have seized the opportunity to expand activities through the acquisition of competitor portfolios.
BNPP has been at the forefront of that trend, buoyed by its “Smart Derivatives” platform that offers structured equities to more than 3,000 users.
In 2013, the bank fought off tough competition to acquire RBS’s structured retail investor products business and flow equity derivatives activities. That deal covered assets with a notional value around US$200bn and included risk transfer on a 1,000-product portfolio of retail structured products.
While the latest ING deal is smaller and less complex, given that it does not include retail assets that are quoted on exchange, the exercise covers around 900 client trades and will see OTC swaps with around 100 counterparties novated to the French bank, according to people familiar with the agreement.
The deal comes alongside signs of a turnaround for the structured products business, which suffered in 2016 against a backdrop of sluggish equity markets that meant autocallable notes did not knock out.
Issuance is running around 20% up so far this year, driven by demand from Japan and Europe. The EuroStoxx 50, a key underlying for structured notes, is up more than 5% so far in 2017.
Hurdles for profitability remain, however, particularly stemming from sweeping MiFID II reforms, which require note issuers to provide best execution disclosures on each trade.
The French bank has a track record in portfolio integration following its 2009 acquisition of a 75% stake in Fortis. In 2012, the bank acquired 1,600 structured products from Macquarie and followed up a year later with the purchase of a €12.5bn equity derivatives book from Credit Agricole, which saw the bank provide full front to back-office services.
That activity was believed to have been a key factor in the agreement with RBS in late 2013. (Reporting by Helen Bartholomew)