Deutsche Bank Deal Could Catapult BNP Into Asias Top Prime Brokers

BNP Paribas SA could gain a top-10 spot among prime brokers in Asia as a result of its agreement to back up and potentially assume control of the electronic trading and prime services of Deutsche Bank AG, according to Eurekahedge Pte.

The German bank is the fifth-largest prime broker in the region, even after the number of its hedge-fund clients slipped by almost one-quarter to 132 since 2010, a survey by trade journal AsiaHedge showed in May. That’s in contrast to Deutsche Bank’s position globally; it didn’t rank among the top seven prime brokers in 2018, according to data from Coalition Development Ltd.

With many banks gravitating toward larger, more profitable clients in a business that ties up capital, BNP would have some decisions to make. Two-thirds of Asia-focused hedge funds oversee less than $100 million, according to Eurekahedge, and the German lender has taken on a multitude of smaller customers. Eurekahedge’s prime broker rankings reflect its estimates of both client balances and number of fund mandates.

Even after a tough few years, 14% of funds in the region still use Deutsche Bank as either a prime broker or trade through it, according to Eurekahedge analyst Mohammad Hassan.

Deutsche Bank and Credit Suisse Group AG had previously benefited in Asia as hedge funds added European banks as prime brokers to avoid being caught up in another U.S. bank failure after the collapse of Lehman Brothers Holdings Inc.

Prime-brokerage divisions cater specifically to hedge funds, lending them cash and securities and executing their trades.

Deutsche Bank’s high-profile clients in the region have included Carl Huttenlocher’s Myriad Asset Management Ltd. and Kontiki Capital Management (HK) Ltd., led by ex-Ziff Brothers Investments LLC Asia head Gregard Heje.

BNP spokesman Andrew Achimu and Deutsche Bank spokeswoman Karene Dufour declined to comment.

Its global business has enabled Deutsche Bank to trade fixed-income and currencies, on top of equities, a rarity among peers in Asia. It can also source harder-to-find securities for funds to borrow for bearish bets, even in Southeast Asia, said two fund executives, who still list Deutsche Bank as their prime brokers. It’s also got an efficient electronic trading system and can supply financing at reasonable prices, they said, asking not to be identified as they aren’t authorized to speak publicly.

Smaller Firms

Deutsche Bank has also courted China-focused managers. It counts Tairen Capital Ltd. as a client, and has won over Chinese quantitative asset management firms expanding offshore after a regulatory crackdown on stock futures trading domestically.

In Asia, Deutsche Bank is known to be more welcoming to smaller outfits. About 56% of smaller funds used it as either a prime broker or to execute trades, according to Eurekahedge.

That approach can earn goodwill, and a chunk of business, as a client thrives. But it can also make business more costly and less profitable, at least in the short term, because not every small manager will succeed.

BNP, meanwhile, is largely a niche bank, strong in certain areas but lacking Deutsche Bank’s breadth and depth. While a deal could jump-start its Asia business, it will have to invest heavily and its success will also hinge on what technology, staff and clients are eventually transferred across.

Bloomberg