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Paris Derivatives Jobs Burn as Market Rues Exotics
July 20 (Bloomberg) -- Dorothee Bary, who graduated in March from Ecole Polytechnique in Paris, France’s premier engineering school, has two degrees in mathematical finance and worked as an intern at BNP Paribas SA, the country’s largest bank. None of that helped her land work as a derivatives trader.
“Before the crisis, I thought there was a 90 percent probability the internship would end with a job,” said Bary, 24, who finished her six-month stint in January structuring insurance products at the bank’s derivatives unit. “The internship went well, but it was impossible” to get the post she had expected.
Bary is one of scores of graduates who have struggled to find employment since BNP Paribas and Societe Generale SA lost their lead in the global market for equity derivatives, including exotic products tied to the performance of securities or indexes.
The Paris-based banks created and dominated the business until debt markets seized up two years ago. BNP Paribas, whose freezing of three funds on Aug. 9, 2007, deepened the credit crunch, and Societe Generale, which blamed a 4.9 billion-euro ($6.9 billion) loss in January 2008 on bets made by a derivatives trader, have taken about $26 billion in writedowns and credit losses since the second half of 2007, according to data compiled by Bloomberg.
‘Material Decline’
The derivatives market shrank for the first time in the second half of 2008, according to the Bank for International Settlements in Basel, Switzerland. Derivatives are contracts whose value is derived from stocks, bonds, loans, currencies and commodities, or linked to specific events such as changes in interest rates or the weather.
Positions in over-the-counter equity-derivative instruments declined 36 percent to $6.5 trillion, and credit-default swap contracts, which protect investors against losses on bonds and loans, fell 27 percent to cover a notional $41.9 trillion of debt, the BIS said in May. Interest-rate derivatives, the largest part of the market, dropped 8.6 percent in the second half to $418.7 trillion outstanding, the report said.
Trading and selling equity derivatives accounted for about 40 percent of Societe Generale’s investment banking revenue in 2006 and 2007, excluding writedowns, and almost a quarter of BNP Paribas’s, according to a June 10 report from JPMorgan Chase & Co. analyst Kian Abouhossein in London.
French Exotics
“French banks have suffered because they are so active in structured products, where we have seen a material decline,” Abouhossein said in an interview.
BNP Paribas Chief Executive Officer Baudouin Prot and Frederic Oudea, his counterpart at Societe Generale, declined to comment.
The equity derivatives business “represents one of our main franchises,” said Michel Peretie, head of Societe Generale’s corporate and investment-banking unit.
Societe Generale generated about $3 billion from equity derivatives last year, down 20 percent from 2007, followed by BNP Paribas, with $2.26 billion in revenue, excluding so-called exceptional losses, according to the June 10 report. New York- based Goldman Sachs Group Inc. had $4.4 billion of equity- derivatives revenue in 2008, up 18 percent from a year earlier.
Goldman Sachs, the biggest U.S. securities firm until it converted to a bank last year, probably will make more revenue from equity derivatives than the French banks in 2009 and 2010, Abouhossein wrote in his report.
Flow Products
Shares of Societe Generale, France’s second-biggest bank by market value, dropped more than 70 percent from their record levels in May 2007. BNP Paribas fell about 46 percent from its peak the same month, and the 63-member Bloomberg Europe Banks and Financial Services Index declined about 66 percent in the period.
Exotic equity derivatives, typically traded over the counter, have fallen out of favor with investors concerned about the risks associated with opaque financial instruments, said Petter Kolm, deputy director of mathematics in the finance masters program at New York University.
Clients and banks continue to demand so-called flow products, which trade on exchanges, to hedge their investments, Kolm said. Goldman Sachs is the leader in this market, especially in the U.S., where French banks lack presence, according to Abouhossein.
“The French are big structured equity-derivatives players, a business where retail clients are still shell-shocked,” said Simon Yates, co-head of European equities at Zurich-based Credit Suisse Group AG. “When the retail market does bounce back, it will be to buy more straightforward, less complex investments.”
No Rebound
A rebound in demand for structured products isn’t likely this year and depends partly on equity markets and new capital requirements, Abouhossein said.
While revenue for equity derivatives probably will increase 16 percent next year, the figures will be 28 percent below 2007 levels “on lower sales of structured products, less hedge fund assets under management, leverage and risk appetite, and a move from complex to more plain vanilla retail products generating lower fees for the investment banks,” according to the analyst.
BNP Paribas announced plans in February to “substantially reduce” its activity in the most complex structured products as the bank reported 1.9 billion euros of “negative revenue” in the equity and advisory business, which includes equity derivatives, in the fourth quarter.
Prot, 58, said in May that BNP Paribas finished closing “difficult to manage” derivatives positions. First-quarter revenue from the bank’s equity and advisory business was 33 million euros, down 90 percent from a year earlier.
BNP Paribas Freeze
While the funds temporarily frozen by BNP Paribas in August 2007 were invested in subprime debt, not equity derivatives, the bank was among the first caught up in the credit market seizure. Its action spooked financial markets and came hours before the European Central Bank opened a 94.8 billion-euro line of credit to encourage firms to lend to each other again.
The next week the U.S. Federal Reserve cut the discount rate it charges banks by 50 basis points to 5.75 percent, the first of 12 reductions.
Societe Generale hasn’t announced plans to scale back its most complex equity derivatives, even after posting negative revenue of about 600 million euros in the fourth quarter at the equities unit, which includes equity derivatives. The bank said it enhanced risk controls after a record trading loss in January 2008 that was blamed on unauthorized bets by Jerome Kerviel, a former trader on the Delta One desk in Paris, who built up 50 billion euros of positions in European stock index futures and disguised them with fake hedges.
Kerviel’s Bets
Kerviel, 32, who has a master’s degree in banking support from the University of Lyon II, has been arraigned on criminal charges of abuse of trust, falsifying documents and computer hacking. If convicted, he may face as many as five years in prison and a 375,000-euro fine. He says he is innocent of the charges because the bank was aware of what he was doing.
Credit Agricole SA’s investment-banking unit Calyon and Natixis SA, two French latecomers in equity derivatives, said last year they will cut back their most complex equity- derivative activities in favor of derivative contracts that focus on a set expiration date and strike price.
“Although French banks may continue to focus on the exotics side, their bread and butter, they have recognized and adjusted to the increased demand for flow products,” said Keith Styrcula, chairman and founder of the Structured Products Association, a New York-based industry trade group.
Mathematics Education
The expansion into equity derivatives by French banks tracked the country’s focus on mathematics education. Societe Generale hired as many as one-third of the graduates of Ecole Polytechnique and Ecole Centrale Paris, another top engineering school, between 1986 and 1990 to design options-based contracts. In the past three years, Societe Generale hired about 20 percent of the graduates from the master’s program in financial mathematics run by University of Paris VI in partnership with Polytechnique, according to the school’s data.
About half of the 88 students who graduated last year from Polytechnique’s probabilities and finance program found work at an investment bank, down from almost 80 percent a year earlier, according to university data. At the Ecole Centrale, just one- third of the “quant” finance graduates found full-time work in the financial industry, down from about 75 percent in each of the previous three years, the school reported.
“These schools are producing high-level people who are clones of each other, but a clone doesn’t always get a job,” said Jason Kennedy, a recruiter who runs Kennedy Associates in London.
‘Graduating Clones’
Applications are drying up too. Nicole El Karoui, the Polytechnique professor who founded the program in probabilities and finance at the state-run university in 1990, said applications have dropped by about 50 percent for the academic year beginning this fall.
“We’re training students in an area where there are no prospects, so of course there are fewer students,” said El Karoui. “In terms of recruitment, the situation is going to be difficult for at least another year.”
At the Universite Paris Dauphine, the Master 203 program, which teaches quantitative and financial economics for work in areas including commodities and risk management, isn’t accepting any students this year.
‘Frozen Recruitment’
The decision “corresponds to a reality,” said Jean-Claude Petard, head of equity at Natixis, which has reduced its equity- derivatives staff to about 220 people from 280 at the end of 2007. “All the main French equity-derivatives houses have at least frozen recruitment.”
BNP Paribas said in February it would cut 1,000 jobs in investment banking, without specifying which areas. Societe Generale said in May it had reduced front-office jobs at the securities unit. While neither company would say how many of the cuts were in equity derivatives, further job reductions aren’t planned for this year.
In the U.K., there are 40 percent fewer job vacancies at investment banks and fund managers than last year, according to a survey by the Association of Graduate Recruiters, a research group in Warwick, England, that collected data from May 15 to June 10. The average investment bank or fund manager received 82 applications for each position, up from 57 a year ago, the survey shows.
Wake-Up Call
For Charles de Ravel d’Esclapon, a Paris native who graduated last year from Paris Dauphine with a master’s degree in the mathematics of finance, the economy and insurance, a six- month internship at BNP Paribas as an equity derivatives structurer didn’t translate into a permanent job in the sector. The lull did allow him to realize that working in a bank wasn’t for him.
“There were few opportunities,” said the 25-year-old, who now works at Paris-based MAPP, an economic consulting firm. “Lehman was a wake-up call in the sense I realized I wanted to do something else.”
Bary, the Polytechnique graduate who sought work as a derivatives trader, has also adjusted her plans. She too landed a job at a consulting firm in Paris managing a team of four building models for insurers. While it isn’t what she had in mind, she said at least she’s putting her math skills to use.
To contact the reporters on this story: Jacqueline Simmons in Paris at jackiem@bloomberg.net; Fabio Benedetti-Valentini in Paris at fabiobv@bloomberg.net.
http://www.bloombergnews.com/apps/news?pid=20601109&sid=an.A16xOkqBs
July 20 (Bloomberg) -- Dorothee Bary, who graduated in March from Ecole Polytechnique in Paris, France’s premier engineering school, has two degrees in mathematical finance and worked as an intern at BNP Paribas SA, the country’s largest bank. None of that helped her land work as a derivatives trader.
“Before the crisis, I thought there was a 90 percent probability the internship would end with a job,” said Bary, 24, who finished her six-month stint in January structuring insurance products at the bank’s derivatives unit. “The internship went well, but it was impossible” to get the post she had expected.
Bary is one of scores of graduates who have struggled to find employment since BNP Paribas and Societe Generale SA lost their lead in the global market for equity derivatives, including exotic products tied to the performance of securities or indexes.
The Paris-based banks created and dominated the business until debt markets seized up two years ago. BNP Paribas, whose freezing of three funds on Aug. 9, 2007, deepened the credit crunch, and Societe Generale, which blamed a 4.9 billion-euro ($6.9 billion) loss in January 2008 on bets made by a derivatives trader, have taken about $26 billion in writedowns and credit losses since the second half of 2007, according to data compiled by Bloomberg.
‘Material Decline’
The derivatives market shrank for the first time in the second half of 2008, according to the Bank for International Settlements in Basel, Switzerland. Derivatives are contracts whose value is derived from stocks, bonds, loans, currencies and commodities, or linked to specific events such as changes in interest rates or the weather.
Positions in over-the-counter equity-derivative instruments declined 36 percent to $6.5 trillion, and credit-default swap contracts, which protect investors against losses on bonds and loans, fell 27 percent to cover a notional $41.9 trillion of debt, the BIS said in May. Interest-rate derivatives, the largest part of the market, dropped 8.6 percent in the second half to $418.7 trillion outstanding, the report said.
Trading and selling equity derivatives accounted for about 40 percent of Societe Generale’s investment banking revenue in 2006 and 2007, excluding writedowns, and almost a quarter of BNP Paribas’s, according to a June 10 report from JPMorgan Chase & Co. analyst Kian Abouhossein in London.
French Exotics
“French banks have suffered because they are so active in structured products, where we have seen a material decline,” Abouhossein said in an interview.
BNP Paribas Chief Executive Officer Baudouin Prot and Frederic Oudea, his counterpart at Societe Generale, declined to comment.
The equity derivatives business “represents one of our main franchises,” said Michel Peretie, head of Societe Generale’s corporate and investment-banking unit.
Societe Generale generated about $3 billion from equity derivatives last year, down 20 percent from 2007, followed by BNP Paribas, with $2.26 billion in revenue, excluding so-called exceptional losses, according to the June 10 report. New York- based Goldman Sachs Group Inc. had $4.4 billion of equity- derivatives revenue in 2008, up 18 percent from a year earlier.
Goldman Sachs, the biggest U.S. securities firm until it converted to a bank last year, probably will make more revenue from equity derivatives than the French banks in 2009 and 2010, Abouhossein wrote in his report.
Flow Products
Shares of Societe Generale, France’s second-biggest bank by market value, dropped more than 70 percent from their record levels in May 2007. BNP Paribas fell about 46 percent from its peak the same month, and the 63-member Bloomberg Europe Banks and Financial Services Index declined about 66 percent in the period.
Exotic equity derivatives, typically traded over the counter, have fallen out of favor with investors concerned about the risks associated with opaque financial instruments, said Petter Kolm, deputy director of mathematics in the finance masters program at New York University.
Clients and banks continue to demand so-called flow products, which trade on exchanges, to hedge their investments, Kolm said. Goldman Sachs is the leader in this market, especially in the U.S., where French banks lack presence, according to Abouhossein.
“The French are big structured equity-derivatives players, a business where retail clients are still shell-shocked,” said Simon Yates, co-head of European equities at Zurich-based Credit Suisse Group AG. “When the retail market does bounce back, it will be to buy more straightforward, less complex investments.”
No Rebound
A rebound in demand for structured products isn’t likely this year and depends partly on equity markets and new capital requirements, Abouhossein said.
While revenue for equity derivatives probably will increase 16 percent next year, the figures will be 28 percent below 2007 levels “on lower sales of structured products, less hedge fund assets under management, leverage and risk appetite, and a move from complex to more plain vanilla retail products generating lower fees for the investment banks,” according to the analyst.
BNP Paribas announced plans in February to “substantially reduce” its activity in the most complex structured products as the bank reported 1.9 billion euros of “negative revenue” in the equity and advisory business, which includes equity derivatives, in the fourth quarter.
Prot, 58, said in May that BNP Paribas finished closing “difficult to manage” derivatives positions. First-quarter revenue from the bank’s equity and advisory business was 33 million euros, down 90 percent from a year earlier.
BNP Paribas Freeze
While the funds temporarily frozen by BNP Paribas in August 2007 were invested in subprime debt, not equity derivatives, the bank was among the first caught up in the credit market seizure. Its action spooked financial markets and came hours before the European Central Bank opened a 94.8 billion-euro line of credit to encourage firms to lend to each other again.
The next week the U.S. Federal Reserve cut the discount rate it charges banks by 50 basis points to 5.75 percent, the first of 12 reductions.
Societe Generale hasn’t announced plans to scale back its most complex equity derivatives, even after posting negative revenue of about 600 million euros in the fourth quarter at the equities unit, which includes equity derivatives. The bank said it enhanced risk controls after a record trading loss in January 2008 that was blamed on unauthorized bets by Jerome Kerviel, a former trader on the Delta One desk in Paris, who built up 50 billion euros of positions in European stock index futures and disguised them with fake hedges.
Kerviel’s Bets
Kerviel, 32, who has a master’s degree in banking support from the University of Lyon II, has been arraigned on criminal charges of abuse of trust, falsifying documents and computer hacking. If convicted, he may face as many as five years in prison and a 375,000-euro fine. He says he is innocent of the charges because the bank was aware of what he was doing.
Credit Agricole SA’s investment-banking unit Calyon and Natixis SA, two French latecomers in equity derivatives, said last year they will cut back their most complex equity- derivative activities in favor of derivative contracts that focus on a set expiration date and strike price.
“Although French banks may continue to focus on the exotics side, their bread and butter, they have recognized and adjusted to the increased demand for flow products,” said Keith Styrcula, chairman and founder of the Structured Products Association, a New York-based industry trade group.
Mathematics Education
The expansion into equity derivatives by French banks tracked the country’s focus on mathematics education. Societe Generale hired as many as one-third of the graduates of Ecole Polytechnique and Ecole Centrale Paris, another top engineering school, between 1986 and 1990 to design options-based contracts. In the past three years, Societe Generale hired about 20 percent of the graduates from the master’s program in financial mathematics run by University of Paris VI in partnership with Polytechnique, according to the school’s data.
About half of the 88 students who graduated last year from Polytechnique’s probabilities and finance program found work at an investment bank, down from almost 80 percent a year earlier, according to university data. At the Ecole Centrale, just one- third of the “quant” finance graduates found full-time work in the financial industry, down from about 75 percent in each of the previous three years, the school reported.
“These schools are producing high-level people who are clones of each other, but a clone doesn’t always get a job,” said Jason Kennedy, a recruiter who runs Kennedy Associates in London.
‘Graduating Clones’
Applications are drying up too. Nicole El Karoui, the Polytechnique professor who founded the program in probabilities and finance at the state-run university in 1990, said applications have dropped by about 50 percent for the academic year beginning this fall.
“We’re training students in an area where there are no prospects, so of course there are fewer students,” said El Karoui. “In terms of recruitment, the situation is going to be difficult for at least another year.”
At the Universite Paris Dauphine, the Master 203 program, which teaches quantitative and financial economics for work in areas including commodities and risk management, isn’t accepting any students this year.
‘Frozen Recruitment’
The decision “corresponds to a reality,” said Jean-Claude Petard, head of equity at Natixis, which has reduced its equity- derivatives staff to about 220 people from 280 at the end of 2007. “All the main French equity-derivatives houses have at least frozen recruitment.”
BNP Paribas said in February it would cut 1,000 jobs in investment banking, without specifying which areas. Societe Generale said in May it had reduced front-office jobs at the securities unit. While neither company would say how many of the cuts were in equity derivatives, further job reductions aren’t planned for this year.
In the U.K., there are 40 percent fewer job vacancies at investment banks and fund managers than last year, according to a survey by the Association of Graduate Recruiters, a research group in Warwick, England, that collected data from May 15 to June 10. The average investment bank or fund manager received 82 applications for each position, up from 57 a year ago, the survey shows.
Wake-Up Call
For Charles de Ravel d’Esclapon, a Paris native who graduated last year from Paris Dauphine with a master’s degree in the mathematics of finance, the economy and insurance, a six- month internship at BNP Paribas as an equity derivatives structurer didn’t translate into a permanent job in the sector. The lull did allow him to realize that working in a bank wasn’t for him.
“There were few opportunities,” said the 25-year-old, who now works at Paris-based MAPP, an economic consulting firm. “Lehman was a wake-up call in the sense I realized I wanted to do something else.”
Bary, the Polytechnique graduate who sought work as a derivatives trader, has also adjusted her plans. She too landed a job at a consulting firm in Paris managing a team of four building models for insurers. While it isn’t what she had in mind, she said at least she’s putting her math skills to use.
To contact the reporters on this story: Jacqueline Simmons in Paris at jackiem@bloomberg.net; Fabio Benedetti-Valentini in Paris at fabiobv@bloomberg.net.
http://www.bloombergnews.com/apps/news?pid=20601109&sid=an.A16xOkqBs
