When Newedge was formed in 2008 it created the largest independent non-bank futures broker by combining futures commission merchants (FCMs) Fimat and Calyon Financial. It was supposed to be the best of both worlds—being independent but having the backing of two of the largest French banks as the entity was a 50/50 partnership between Societe Generale and Credit Agricole.
It soon jumped to the top of the FCM world surpassing all others—even perennial leader Goldman Sachs—in customer segregated funds in its first year of operations. However, by 2012 some of its advantages proved to be disadvantages, and one partner, Credit Agricole, was looking to get out. Rumors of a sale persisted through 2012 but who could be a buyer for such a behemoth? Turns out no one, so the question turned to whether one partner could buyout the other out.
What was needed was a clear vision and clear mission, which may have been achieved this May when Societe Generale completed its acquisition of Credit Agricole's 50% stake in Newedge bringing Societe Generale’s ownership to 100%.
Deputy Head Global Markets, Societe Generale and CEO Newedge David Escoffier says the transaction, besides bringing clarity to Newedge, which was needed, will create the right model going forward to be profitable in a changing world. “It is important to present clarity,” Escoffier says in an interview with Futures. “There was a long period of people asking ‘what is happening with the firm?’ during what was obviously a time of change. Change is welcome but at the same time demanding.”
While Newedge employees looked for clarity, the broker needed to define one mission that wasn’t at odds with itself. Escoffier explains that the two banks that owned Newedge were competing with each other at a time when the entire FCM model was being challenged. “With the old joint venture, Newedge was stuck in the middle, which was difficult because decision times were slow and it was hard to commit to long-term investments. Once this deal was made, it gave Newedge clear direction, which was important for clients,” he says.
On the surface what is most obvious is a stronger identification with the bank. “SocGen and Newedge are now one entity,” says Escoffier. While they are keeping the Newedge name, the new business cards indicate Societe Generale branding. “The FCM is fully integrated within the bank's Global Markets Division. Newedge identifies the prime clearing & brokerage arm of the investment bank,” he adds.
Not having to compete with yourself is also a plus.
Escoffier brings a unique perspective of the players. He worked for Credit Lyonnais, which was merged into Credit Agricole and the two formed Calyon. In the late 1990s, he worked in the securities department of Societe Generale, which would later merge its futures broker, Fimat, with Calyon, forming Newedge.
Over the counter
Like most other large FMCs, Newedge had and has plans to be more involved in the new world of over-the-counter cleared swaps, but the banking world always had an advantage and now Newedge can exploit that advantage instead of being subject to it.
“Clearing of OTC derivatives today is not priced correctly,” Escoffier says. “Many market participants give the clearing away for execution. How you make money is by getting more clients in more markets, and then organize the cross coverage much better so that you meet more of their needs. Working in silos is not a viable option any longer.”
The bank can be part of these trades now. “Brokering OTC is not in itself very profitable,” Escoffier says. “The problem in the past was there was a single set of products, namely clearing futures and options. Nowadays, most clients want broader relationships –they want specialists in futures and options. But they also want enhanced services such as securities financing, and the ability to execute globally on cash equities and bonds. It is also about handling swaps, as well as repos.”
When all you offer is futures and options clearing, it is hard to compete with the largest players, particularly as your regulatory cost goes up globally. Newedge is the largest clearer of listed derivatives globally, according to Escoffier, and must therefore be compliant globally. “The only way to adjust to substantial regulation in different jurisdictions is to have a strong balance sheet. You need to invest, and we are investing hundreds of millions in the machine.”
It is necessary to be a bank, he explains. “Now, we can connect clients to more than 125 markets. I don’t think any other firm has that type of reach. Newedge could do part of that, and now thanks to Societe Generale, we have added cash markets, the one leg of the trade that was missing before.”
He adds that being a bank will be very helpful with OTC clearing. “We are a one-stop shop.”
This is particularly true in the post Dodd-Frank world. “Markets are about less leverage, less capital, and more transparency,” Escoffier says. “In the end, it is an agency business, what I call ‘Agency+’: a mix of agency and the ability to provide back stopped balance sheet risk taking for your key accounts. That is precisely the mission of Newedge Agency teams in Global Markets.”
Be sure to look for Part 2 of this story, Newedge moves forward.