Bright young things look elsewhere as derivatives dry up

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, 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 per cent 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 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 in August 2007 deepened the credit crunch, and Societe Generale, which blamed a €4.9 billion ($1.064 trillion) loss in January last year on bets made by a derivatives trader, have taken about US$26 billion ($39.7 billion) in writedowns and credit losses since the second half of 2007.

The derivatives market shrank for the first time in the second half of last year, according to Switzerland's Bank for International Settlements.

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 fell 36 per cent to US$6.5 trillion, and credit-default swap contracts, which protect investors against losses on bonds and loans, fell 27 per cent to cover a notional US$41.9 trillion of debt, the BIS said in May. Interest-rate derivatives, the largest part of the market, fell 8.6 per cent in the second half to US$418.7 trillion outstanding.

Trading and selling equity derivatives accounted for about 40 per cent of Societe Generale's investment banking revenue in 2006 and 2007, excluding writedowns, and almost a quarter of BNP Paribas', JPMorgan Chase analyst Kian Abouhossein says.

Societe Generale generated about US$3 billion from equity derivatives last year, down 20 per cent from 2007, followed by BNP Paribas, with US$2.26 billion in revenue, excluding so-called exceptional losses, a June 10 report said. New York-based Goldman Sachs Group had US$4.4 billion of equity- derivatives revenue last year, up 18 per cent from a year earlier.

Shares of Societe Generale, France's second-biggest bank by market value, dropped more than 70 per cent from their record levels in May 2007. BNP Paribas fell about 46 per cent from its peak the same month, and the 63-member Bloomberg Europe Banks and Financial Services Index declined about 66 per cent in the period.

Exotic equity derivatives, typically traded over the counter, have fallen out of favour with investors concerned about the risks associated with opaque financial instruments, says Petter Kolm, deputy director of mathematics in the finance masters programme at New York University.

Clients and banks continue to demand so-called flow products, which trade on exchanges, to hedge their investments, says Kolm.

A rebound in demand for structured products isn't likely this year and depends partly on equity markets and new capital requirements, says Abouhossein.

BNP Paribas announced plans in February to "substantially reduce" its activity in the most complex structured products as the bank reported €1.9 billion of "negative revenue" in the equity and advisory business, in the fourth quarter. First-quarter revenue from its equity and advisory business was €33 million, down 90 per cent from a year earlier.

Societe Generale hasn't announced plans to scale back its most complex equity derivatives, even after its equities unit posted negative revenue of €600 million in the fourth quarter.

The bank said it enhanced risk controls after a record trading loss in January 2008 that was blamed on unauthorised bets by former trader Jerome Kerviel, who built up €50 billion of positions in European stock index futures and disguised them with fake hedges. He faces criminal charges but says he is innocent because the bank was aware of what he was doing.

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 per cent of the graduates from the master's programme in financial mathematics run by University of Paris VI in partnership with Polytechnique.

About half of the 88 students who graduated last year from Polytechnique's probabilities and finance programme found work at an investment bank, down from almost 80 per cent a year earlier.

At the Ecole Centrale just one-third of the "quant" finance graduates found full-time work in the financial industry, down from about 75 per cent in each of the previous three years.

Applications are drying up too. Nicole El Karoui, the Polytechnique professor who founded the state-run university's programme in probabilities and finance, said applications had fallen about 50 per cent.

At the Universite Paris Dauphine, the Master 203 programme, which teaches quantitative and financial economics, isn't taking students.

Jean-Claude Petard, head of equity at Natixis, said: "All the main French equity-derivatives houses have at least frozen recruitment."

BNP Paribas said in February it would cut 1000 jobs in investment banking. In Britain, there are 40 per cent fewer job vacancies at investment banks and fund managers than last year, according to a survey by the Association of Graduate Recruiters.

For Charles de Ravel d'Esclapon, 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 realise working in a bank wasn't for him.

He now works at Paris-based MAPP, an economic consulting firm.

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. She says at least she's putting her maths skills to use.

- BLOOMBERG