Why did you join Itaú BBA?
I have never been a part of an investment bank that dominated its home market as much as Itaú BBA does. The bank is number one across the board in almost every category, including investment banking, equities and fixed income in Brazil, and it is in the top tier of the wider LatAm market. It is an advantage that we are intending to leverage.
Also, Itaú BBA is large and well capitalised—it is the largest bank in the southern hemisphere and a part of the Brazil economy, which is the sixth largest economy in the world. When you put these together and add its commitment to internationalising its business with products such as securities finance and prime finance, it was a no brainer decision to join Itaú BBA.
Furthermore, I guess that I get cruel pleasure from going through the pain of building a business and watching it grow from the ground up. I have built two of these platforms already and this is my third. When you build from the ground up like this, and you do not have to unbundle anything, you always have the opportunity to use the best technology, business principals and governance to deliver a cutting edge product. This is especially true in wake of the ever changing, new regulatory environment and investor concerns about counterparty risk concentration. There is nothing to unbundle and re-build here. We are looking at a white sheet of paper, envisioning three years ahead, thinking about how the business should look and are building from there.
The most important part for me was not missing out on helping a bank to take advantage of its growing prominence in what is probably the most dramatic shift in global investment banking in a generation. The markets are always moving to more efficiency and a more even playing field. In the current environment, a more even distribution of global investment bank market share and revenues are inevitable. I am certain that Itaú BBA will be a part of the growth in this trend.
What do you hope to achieve?
Itaú BBA has a strong presence in the securities lending market in Brazil. We will look to leverage this so that we can internationalise the business, to provide local clients with more global product solutions, and bring more international clients into the local Brazil and LatAm remit where possible. Once we get that right, we will look into developing more esoteric international products for our clientele, particularly market access, as well as synthetic and physical prime offerings further down the road.
When does a bank such as Itaú BBA fit into the prime brokerage market?
Medium and larger hedge funds are always trying to balance the optimal mix of prime/swap providers on their roster so that they can obtain operational efficiency and minimise their prime brokerage counterparty risk. If a hedge fund has too many prime brokers, it can be a challenge to manage the operation. Too few prime brokers could lead to investors knocking on the hedge fund’s door with pitchforks and torches complaining about undue counterparty risk.
With the ‘black cloud’ discussions in Europe and the ‘banks that are too big to manage’ debate in the US, on top of the upcoming higher capital requirements of new regulations, hedge funds and asset managers are actively seeking new outlets to diversify their risk. So, when we talk about the optimal mix of providers, the pendulum has likely swung to choosing more primes/swap providers rather than less.
Given its hub locale, Itaú BBA is a great hedge to these trends. We will not be everything to everybody, as our main focus will always remain on Brazil and pan-LatAm products, but we will look after those clients that execute through our equity and fixed income local market capabilities with a world class, global, ‘post- trade’ solution.
How much demand is there from hedge funds for securities lending?
Although volumes are down everywhere, securities lending performance is still a decisive factor to a hedge fund when it is choosing a prime brokerage provider.
Stable securities lending supply is critical to a hedge fund, because they are still the largest shorter of assets than any other organisation. It is no secret that prime brokers are harshly judged by the stability of their lending supply to the funds. Inconsistent or disrupted short supply means disrupted trading strategies to the fund, which could put prime brokers in ‘the penalty box’.
While favourite hedge fund strategies involving shorting equity, such as convertible bond arbitrage, have been down consistently since 2009, equity long/short strategies are expected to remain a growing and major strategy of hedge funds over the next few years. Prime brokers will continue to refine and develop competitive securities lending/collateral transformation offerings as a result.
What regulations are of most concern to hedge funds and how are they affecting their appetite for securities lending?
The hedge fund clients that I have spoken to over the past year are becoming increasingly concerned with capital related regulatory changes such as Basel III and how they will affect their providers’ abilities to maintain committed balances to them. When this is macro-regulatory directive is overlaid with the very region-specific regulatory requirements that we are witnessing in Europe and somewhat in the US, there is a possibility that a ‘regulatory imbalance’ could be created that is defined by these regional centricities. Depending on the severity of the imbalance per location, it could force certain prime/swap providers to completely re-assess the balance sheet that they deploy to this business.
The last thing that a hedge fund wants to hear from a prime broker is that its balance sheet allocation is going away. At best, it is operationally intensive to move assets around on short notice, and at worst, it disrupts hedge funds’ trading strategies. This is why they are very focused on the matter.
Since Itaú BBA is looking to deploy only new capital or balance sheet to the prime business, we are in a different situation. We will carefully account for the upcoming and long-term regulatory requirements affecting Credit Risk RWAs and ROE, and only then will we deploy allocations. This way, we are less likely to have to reverse course and surprise our clients with bad news.
What types of clients are you targeting?
Firstly, we must build a securities finance platform to take care of Itaú BBA itself. We need to industrialise our ability to monetise any and all assets at the bank. I have to make sure that we are able to turn assets into cash to optimise reliance on wholesale unsecured funding. Internally, I need to be the customer of this bank first.
Secondly, we will cater to existing clients at Itaú BBA, which already includes some of the larger asset managers, corporates and institutions. There are plenty of clients doing business at Itaú BBA. We want to develop more products to offer to them, and our prime mandate will be designed to fill some of that gap.
What types of products do you want to offer?
We are focusing on developing the more vanilla flow products first, including securities lending, repo, collateral management and collateral transformation. As we are able to better leverage Itaú BBA’s already strong geographical footprint, we will be adding products into the UK and Europe, and then into Asia and the Middle East. This will be led by a market access platform to give our clients the ability to not only access Brazil underliers in different ways, but other emerging, and frontier markets that are important to our clients. We then plan to offer a more industrialised synthetic prime platform, and if required down the road, a physical offering.
However, I think that the trend towards a physical relationship with providers, at least from the large hedge fund perspective, is reducing. Most of the largest hedge funds have their own custody accounts and they will allow a prime broker to clear for them or finance for them, but they will not let a prime broker do both, because of the counterparty risk issue. We’ll take these into consideration and perhaps partner with a custodian in that space.
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