What are the different financial products traded in financial markets?

November 14, 2022 by Louis DETALLE

What are the different financial products traded in financial markets?

In this article, Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023) explains what are the main financial products traded in financial markets.

What is a financial product?

Financial ‘products’ or ‘instruments’ are contracts that are traded on financial markets. Each type of product is traded in a specific financial market. In financial institutions, each type of product is managed by a dedicated team.

Financial products also differ in their type of risk and their risk level. As expected return and risk are positively related, (expected) returns on financial products also differ.

What are the three most simple types of financial products?

Investing in a share means acquiring a share in the capital of a company. The value of the share varies, depending in particular on investors’ expectations of the company’s earnings. These shares can be traded on the financial markets if the company is listed on a stock exchange.

As the value of the investment is not guaranteed, investing in shares is risky. It can be seen as a long-term investment with sometimes significant short-term fluctuations, as we can see at the moment with the disturbances linked to the war in Ukraine.

Bonds

Buying bonds therefore means lending at an interest rate and over a period known from the outset. For this reason, the cash flows of a bond can be computed from the outset. But financial risks (interest rate risk and credit risk) remain for such a product.

The risk associated with a bond is in fact that of a default by the lender, either that it cannot pay the interest or repay the capital. The stronger the borrower, the less risky the bond. As the expected return and risk of a bond are positively related, it is possible to anticipate the interest rate of a bond by looking at the rating of the company or the country according to the rating agencies (about credit rating you can read this post).

Foreign exchange

The foreign exchange market (or ‘forex’) is where currencies (dollar, euro, etc.) are traded. The exchange rates between currencies can fluctuate very quickly and create a currency risk in converting one currency into another.

What are the other types of financial products?

Options

Options are so-called “derivatives” because their value depends on the value of another asset, known as the “underlying”.

These underlyings can be simple financial products such as those mentioned above, or physical products (commodities) or stock market or weather indices, for example.1 in the Resources section) will not be affected by the new bond issue.

A special case: the Stock Options

The stock option program is a compensation tool available to companies with shares (listed or unlisted). It is generally not granted collectively, but rather seeks to build loyalty and motivate key employees for the company’s strategy by associating them with its results, such as top management.

Stock options are subscription options or stock purchase options. Certain employees or corporate officers have the right – but not the obligation – to buy shares in the company in which they work, at a price fixed at the time of grant. These are therefore similar to the options mentioned above, whose underlying asset is the share. However, the major difference is that, unlike options that can be traded on the financial markets, stock options are reserved for certain employees of the company who can only sell them if the bylaws enable them to do so.

Resources

Youtube 1-hour course explaining the main financial products for those who want to deepen their knowledge about it…

About the author

The article was written in November 2022 by Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023).

A quick review of the DCM (Debt Capital Market) analyst's job…

November 14, 2022 by Louis DETALLE

A quick review of the DCM (Debt Capital Market) analyst’s job…

In this article, Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023) explains what an analyst in Debt Capital Market (DCM) works on, on a daily basis.

What does DCM consist in?

The Debt Capital Market or DCM teams are used to cover the debt financing needs of organizations via financial markets. For this reason, they assist companies in the issuance of bonds and loans. This job is perfectly centered between corporate finance and financial markets! The clients of a DCM team are very broad and regroup corporate, financial institutions and governments.

The DCM analyst’s job is therefore a financing-related job like the Equity Capital Market (ECM). However, it differs by the nature of the financing offered: debt or equity.

Why would a company resort to DCM rather than ECM?

The main advantage of issuing debt rather than equity is that a company will not have to sell any share of its capital. The company’s shareholders will maintain their shares in the company, in order to keep control of it. The counterpart to this is the repayment obligation inherent in the financial debt, which does not exist when the company issues shares. Indeed, legally, there is no obligation for a company to pay dividends to its shareholders, whereas the repayment of interest and principal on the debt is contractually binding.

The DCM is therefore an effective solution to attract a large number of clients such as companies, but also actors unable to intervene in the equity markets: the governments. Indeed, governments, supranational institutions or sovereign wealth funds cannot sell part of their capital; they find in the bond market a source of liquidity. Traditionally, countries offering solid guarantees of interest payments and bond repayment – the United States, Germany and France – are the biggest players on the bond markets.

What does an analyst in DCM work on?

The DCM team of a bank works mainly on three dimensions: commercial relationship, structuring, and syndication. There are usually dedicated analysts devoted to each task.

Commercial relationship

Through the commercial relationship, the DCM team will try to understand the client’s needs and find a customized solution. The objective is therefore to define the amount of debt to be issued, based on the client’s financing needs, outstanding debt and solvency. This origination work therefore requires an overall view of the client’s profile and capital structure to ensure that its rating will not be affected by the new bond issue (about credit rating you can read this post.

Structuring

This dimension is more technical. This is the case when an investment bank has to offer more sophisticated products such as convertible bonds, bonds with warrants or bonds redeemable in shares. Structuring is mainly concerned with hybrid debt issues. These products offer different levels of risk for investors who will participate to the issuance.

Syndication

Syndication relates to oversized loans that requires allocation among different banks.

Why do DCM jobs appeal so much to business school students?

First of all, it is the dynamic working environment that investment banking constitutes that attracts young graduates. Like ECM, DCM is marked by a culture of high standards and maximum commitment, with highly responsive teams and extremely competent colleagues. Working in a high-powerded team is very stimulating, and often makes it possible to approach the workload with less apprehension and to rapidly increase one’s competence.

The position of DCM divisions within investment banks also makes the job really interesting because the DCM can interact with other departments like M&A. Because as we have seen together, a DCM job requires the ability to manage theoretical models, market trends and legal specificities. For that matter, a DCM career can be very challenging, and this is what young graduates seek for.

Resources

Youtube Interview with a DCM originator at Natixis

About the author

The article was written in November 2022 by Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023).

Focus on the General Inspection in banks

November 14, 2022 by Louis DETALLE

Focus on the General Inspection in banks

In this article, Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023) explains the General Inspection in banks.

What is the General Inspection?

The General Inspection (GI) path is a 3-to-9-year training program used to identify and develop the banking leaders of tomorrow. Indeed, during this extensive Gradutate Program, the General Inspectors (GI) will experiment many divisions of the bank (retail banking investment banking, asset management) and approach their functioning from different perspectives.

The GI’s tasks can be cross-cutting, specific or regulatory, and they change approximately every 6 months, allowing General Inspectors to work on new subjects each time. For example, they may relate to the global strategy of the retail bank or to the foreign exchange risk control process in the trading room. For a French bank, the assignments may take place both in France and abroad and therefore involve a lot of travel. During their missions, the GIs will meet regularly with senior managers, and by training, enabling the GI team to submit its recommendations, also known as the audit report.

What banks recruit General Inspectors and how does the recruitment process go?

Banks such as BNP Paribas, BPCE Société Générale, and La Banque Postale in France, organize competitive exams each year. Candidates are mainly freshly graduate students from business schools and sometimes from engineering schools. Foreign banks like HSBC recruit also inspectors with a few years’ experience.

This exam consists of a written test, followed by an oral test, and finally a presentation in front of a grand jury.

The written test lasts about four hours and consists of strategic and operational cases in which you will have to demonstrate your ability to analyze financial data by using relevant indicators.

The oral test consists of a group interview of about eight candidates in the form of a simulation during which you will be observed by a jury. You will then take part in a traditional motivational interview with former managers of the General Inspection who will ask you questions about your career objectives.

Finally, if you pass these two stages, you will be invited to an HR interview which will allow you to debrief on a personality questionnaire, before taking part in the grand oral in front of a jury composed of the bank’s managers.

What are the main exits for General Inspectors?

After completing the General Inspection track in a bank, a General Inspector may move into management positions (like in the retail division of the bank) or more operational and hands-on positions (structuring, trading or financing).

There are also opportunities in support functions such as the Risk and Compliance Office departments, as well as in the Middle Office, given the appropriate training provided by the General Inspection. Exits to the Front Office as well as to Trading and M&A are relatively less easy given the lack of operational experience.

Resources

BNP Paribas Job description: Inspector

BPCE Job description: Inspector

Société Générale Job description: Inspector

La Banque Postale Job description: Inspector

About the author

The article was written in November 2022 by Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023).

The different legal types of companies in France

November 14, 2022 by Louis DETALLE

The different legal types of companies in France

In this article, Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023) explains what the different legal types of companies exist in France.

What are the main legal forms of companies that someone can create in France?

The limited liability company (Société à Responsabilité Limitée or SARL)

The SARL offers the advantage of a simple structure in which the liability of the partners (“associés” in French) is limited to the amount of their Initial Investment in capital.

The initial capital of the SARL, of which the French law sets a minimum amount of one euro, is divided between at least two partners.

The one-person” limited liability company (“Entreprise unipersonnelle à responsabilité limitée” or EURL)

A special type of SARL is the EURL with only one partner.

Its operating rules are very similar to those of the SARL. The main difference concerns its tax system: its profits are automatically taxed as income in the name of the partner, although it is possible to opt for corporation tax.

The simplified joint stock company (“Société par Action Simplifiée” or SAS)

This relatively recent form of company is enjoying some success (especially for start-ups). Many SAs have been transformed into SASs. The rules governing it are similar to those of the SA. However, some measures make it simpler. For example, there is no minimum amount of share capital required, you can create a SAS with €1!

The public limited company (“Société Anonyme” or SA)

The SA is formed by at least two shareholders with a minimum capital of €37,000. The number of shareholders is at least seven if the limited company is listed on the stock exchange. It is managed by a chairman and a managing director (who may be one and the same person) and by a board of directors composed of at least three people.

It is subject to the obligation to appoint an auditor (“commissaire aux comptes” in French), especially if it is listed!

General partnership (“Société en nom collectif” or SNC)

This form of company is rarely used because it has the disadvantage of not protecting the assets of its partners: they are indefinitely and jointly and severally liable for the company’s debts out of their personal assets.

What are the main characteristics that must be borne in mind when creating a company in France?

Let’s review what are the advantages of the main types of companies:

SAS vs SA

Compared to the SA, the SAS offers the advantage of flexibility: the French law allows the partners to organize its operation freely in the firm’s status. The writing of the status requires the advice of a qualified professional, as it can lead to the development of rules that would be difficult to apply later.

Because of its cumbersome operating rules, the SA should be reserved for projects of a certain size. It is also used when shareholders who are not involved in the business want to exercise control in the board of directors. The main advantage of this status is that it allows a very large amount of share capital to be built up in order to finance expensive investments.

SARL advantage: limited liability

The main advantage of the SARL status is the limited liability of the partners. They are free to determine the amount of share capital and therefore the contributions they wish to make when setting up the limited liability company and are only liable for the amount of their contributions. For that matter, these companies are especially adapted for partners who wish to protect their personal capital.

SNC

No minimum amount is required for the initial capital, which can be a major advantage. On the other hand, the shares of the capital can only be transferred after having obtained the agreement of all the partners, which makes any change in the composition of the capital complex.

EURL advantage: protecting your personal capital

The EURL allows you to secure your personal assets. By creating such a company, your liability is in principle limited to the amount of your contributions. Your professional creditors cannot therefore sue you personally unless you have committed management errors. If you are not guilty of mismanagement in your capacity as manager and you have not given any personal guarantees in connection with your project, your personal assets are safe in the event of difficulties in the company.

Useful resources

URSSAF Registration of a company in France

Insee Information for the registration of a company in France

About the author

The article was written in November 2022 by Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023).

A quick review of the ECM (Equity Capital Market) analyst's job…

November 4, 2022 by Louis DETALLE

A quick review of the ECM (Equity Capital Market) analyst’s job…

In this article, Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023) explains what an analyst in ECM works on, on a daily basis.

What does ECM consist in?

The Equity Capital Markets or ECM teams are used to cover the equity financing needs of companies via financial markets. For this reason, they assist companies in initial public offerings (IPOs) and then seasoned equity offerings (SEOs), convertible bond issuances, capital increases or squeeze. The ECM analyst’s job is therefore a financing-related job like the Debt Capital Market (DCM), which differs, however, by the nature of the financing offered: debt or equity.

What does an analyst work on?

The analyst may first work on the origination of the deal. This involves, for example, proposing a financing solution to the client in parallel with a merger or acquisition (M&A) transaction. This will require a major pitch to convince the client that the proposed financing solution is the most suitable for its needs. On the other hand, the analyst will also have to work upstream on the technical aspects of the ECM transaction, i.e., the pricing of the transaction to reassure the client that the transaction will be successful. This is both a technical and commercial job, with strong relations with clients and other teams in the bank.

In parallel to this technical and commercial work and directly linked to the ECM transaction, the analyst must also work with the legal teams on the structuring of the transaction. This is often overlooked, but a share issue is a financial as well as a legal operation. That is why ECM teams also work on the tax and legal aspects of a share issuance or IPO for example.

Finally, the ECM analyst must regularly inform himself on the behavior of the financial markets in order to choose the most opportune moment for an IPO or a share issuance for example. The current context of massive inflation and instability linked to the war in Ukraine, for example, invites investors in the financial markets to be very cautious and therefore to invest less than usual. This is the reason why IPOs are so rare at the moment, as players wishing to go public fear the response of the primary markets. This work of monitoring the financial markets will be done by looking at the records on Bloomberg for instance, in order to obtain insights on the major market trends.

Why does ECM jobs appeal so much to students?

First of all, it is the dynamic working atmosphere that investment banking constitute that also attracts young graduates. ECM is marked by a culture of high standards and maximum commitment, with highly responsive teams and extremely competent colleagues. Working in a quality team is very stimulating, and often makes it possible to approach the workload with less apprehension and to rapidly increase one’s competence.

The position of ECM divisions within the Investment Banks also makes the job really interesting. Because as we have seen together, an ECM job suggests an ability to manage both theoretical models, market trends and legal specificities. For that matter, an ECM career can be very challenging, and this is what young graduates seek for.

What are the main exits for ECM?

What is special about ECM is that it is a profession between corporate finance and market finance, which means that it is possible to move into one of these two branches after working in ECM. Some go into Venture Capital or late stage start-ups to build on their knowledge of IPOs. Others go into Sales & Trading, although this seems to be more rare.

Resources

Coursera Lecture on ECM & how they work

Indeed 55 Capital Market Interview Questions (With Sample Answers)

About the author

The article was written in November 2022 by Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023).

What are the missions of the financial departments of CAC 40 groups?

November 4, 2022 by Louis DETALLE

What are the missions of the financial departments of CAC40 groups?

In this article, Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023) explains what are the missions of the financial departments in CAC40 groups.

What is the use of the Finance Department?

In a sentence, the Financial Department should be able to answer the following question at any time: “Who should I pay, when and how ?”

The finance department is a key department of the company as it implements financial tools to assist in strategic decision-making, and thus prevents financial risks. In other words, the finance department helps plan the development strategy of the company by ensuring all financial resources are available at any time for example.

For that matter, the financial department of the company works neck and neck with the Board of Directors of the CAC40 Group which define the strategy of the Groups for the months and years to come. The Chief Financial Officer (CFO) will then ensure that the financial resources needed by the company are available to the company at any time of the strategy implemented.

What are the main topics that the Financial Department deals with?

There are a great number of missions that the Chief Financial Officer will have to conduct, but here are the main ones:

About the Group’s solvency: At every time, a CAC40 Group must be solvent, that means they are supposed to be able to reimburse their debts at the previously agreed-upon time. To assess the ability of the Group to do so, the Financial Department has to create Excel models to anticipate the debt repayment over a short, medium & long terms. Obviously, that means the Financial Department will also conduct many calls with the banks to ask for the implementation of credit lines.

Ensuring the management of the company’s cash flow, i.e., its capacity to collect sufficient income to cover its operating cycle: permanent monitoring and management of the teams (customer accounting, supplier accounting, cash flow, etc.), and of the operational activities. The implementation of treasury boards allows the monitoring of the above criteria.

To perform well the previous missions, the CFO (and the Finance Department more generally) has to organize meetings with the lenders, the suppliers and the clients in order to negotiate the payment periods. Indeed, to alleviate the treasury of the CAC40 Group, many solutions exist & it is the CFO’s job to invent new ones.

What is interesting and demanding as a CAC40 CFO?

First of all, since the role of the financial department is crucial to ensure the sustainability of a company because they deal about the solvency of the Group, this suggests that they are implicated in every decision made. They intervene upstream and downstream of each management decision and comes up with corrective measures in the event of financial problems. For that matter, working as a CFO of a CAC40 company requires the ability to see the big picture.

On the other hand, since the financial departments of CAC40 groups are audited every year, the finance department must keep a written record to justify any accounting item from a legal point of view. This requires a high level of organizational skills and a minimum of legal knowledge for the time when the Big 4 firms will conduct the audit of the Group.

Resources

Association Nationale des Directeurs Financiers et de Contrôle de Gestion

Youtube Interview with Gilles Bogaert, CFO of Pernod Ricard

Ebook on the future of CFOs…

About the author

The article was written in November 2022 by Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023).

A quick presentation of the Restructuring job…

November 1, 2022 by Louis DETALLE

A quick presentation of the Restructuring job…

In this article, Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023) explains the job of an analyst in Restructuring.

What does Restructuring consist in?

Restructuring is a term that encompasses all professionals working to assist companies in difficulty. In this market, various categories of actors are involved: debtors (often the company in difficulty), creditors (which may be banks), shareholders (of the company in difficulty) and managers.

Restructuring is an activity that comes to the aid of companies facing economic and financial difficulties in the course of their lives that could threaten their survival in the short or medium term. The particularity of this sector is that it requires both a real financial technicality and a legal technicality, which are invaluable during complex collective procedures.

This activity is particularly fashionable in the current context, marked by the post-covid period, and it should be noted that the restructuring profession generally does well in periods of crisis or post-crisis since the number of companies in difficulty increases.

What does an analyst in Restructuring work on?

There are several situations in which a company in difficulty may call on the services of a restructuring consultancy.

However, if a general methodology is to be given, the missions of a restructuring analyst are generally as follow:

Analysis of the company’s history and the choices that led it to find itself in this situation (collective procedure in France for example). The first step is therefore to determine how the company got into such difficulties. The objective is simply to understand the choices and events that led to this situation.

A strategic due diligence is then required: In order to understand the prospects for improving the company and its activity, the business plan submitted by the company must be carefully examined in order to gauge the company’s future ability to repay its creditors.

To do this, a comparative analysis of the business plans of the last 10 years compared to the results actually achieved may be judicious in order to gauge the realistic nature of the company’s management. A forecast analysis of the evolution of the company’s market is also essential to assess whether the company will evolve in a favorable context or not. A strategic analysis must complete this due diligence work to see if the business strategy implemented is consistent with the developments anticipated by the restructuring firm.

Definition of the sustainable debt level and production of a debt repayment plan: Next comes a turnaround plan to suggest ways to improve the company’s management and profitability. This may involve reducing the cost structure, requesting longer payment terms to relieve pressure on operating cash flow.

Finally, the company will have to define its sustainable debt level. The company will propose a new sustainable debt according to the estimates made by the Restructuring firm. This will allow the company to continue its activity under new conditions that will enable it to repay the old debts that have not been honored as well as the new debt intended for the continuation of the activity.

In doing so, the restructuring firm will enable the creditors to assess the company’s future capacity to honor its debts in the event of a continuation of its activity under the terms proposed in the turnaround plan.

What is interesting & demanding in Restructuring?

First of all, a restructuring analyst can work on extremely complex cases, both because of the number and nature of the players involved and because of the situations of the companies in difficulty.

Indeed, if all economic crises are different, it is also because all the events that cause them have a different impact on companies. This is why each restructuring assignment is different from another, and this is an aspect that many professionals in this sector stress.

However, this diversity of subjects obviously suggests complexity since each subject is not like any other. On the other hand, the topics encountered are related to both legal and financial considerations, which requires skills in Law as well as in Financial Modelling. Profiles with these two facets are therefore highly appreciated.

Useful resources

KPMG’s definition of Restructuring

An article about how Restructuring creates value for companies…

About the author

The article was written in October 2022 by Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023).

Understand the mechanism of inflation in a few minutes?

November 1, 2022 by Louis DETALLE

Understand the mechanism of inflation in a few minutes?

In this article, Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023) explains everything you have to know about inflation.

What is inflation and how can it make us poorer?

In a liberal economy, the prices of goods and services consumed vary over time. In France, for example, when the price of wheat rises, the price of wheat flour rises and so the price of a loaf of bread may also rises as a consequence of the rise in the price of the raw materials used for its production… This small example is only designed to make the evolution of prices concrete for one good only. It helps us understand what happens when the increase in price happens not only for a loaf of bread, but for all the goods of an economy.

Inflation is when prices rise overall, not just the prices of a few goods and services. When this is the case, over time, each unit of money buys fewer and fewer products. In other words, inflation gradually erodes the value of money (purchasing power).

If we take the example of a loaf of bread which costs €1 in year X, while the price of the 20g of wheat flour contained in a loaf is 20 cents. In year X+1, if the 20g of wheat flour now costs 22 cents, i.e., a 10% increase over one year, the price of the loaf of bread will have to reflect this increase, otherwise the baker will be the only one to suffer the increase in the price of his raw material. The price of a loaf of bread will then be €1.02.

We can see that here, with one euro, i.e., the same amount of the same currency, from one year to the next, it is not possible for us to buy a loaf of bread because it costs €1.02 and not €1 anymore.

This is a very schematic way of understanding the mechanism of inflation and how it destroys the purchasing power of consumers in an economy.

How is the inflation computed and what does a x% inflation mean?

In France, Insee (Institut national de la statistique et des études économiques in French) is responsible for calculating inflation. It obtains it by comparing the price of a basket of goods and services each month. The content of this basket is updated once a year to reflect household consumption patterns as closely as possible. In detail, the statistics office uses the distribution of consumer expenditure by item as assessed in the national accounts, and then weights each product in proportion to its weight in household consumption expenditure.

What is important to understand is that Insee calculates the price of an overall household expenditure basket and evaluates the variation of its price over time.

When inflation is announced at X%, this means that the overall value spent in the year by a household will increase by X%.

However, if the price of goods increases but wages remain the same, then purchasing power deteriorates, and this is why low-income households are the most affected by the rise in the price of everyday goods. Indeed, low-income households can’t easily cope with a 10% increase in price of their daily products, whereas the middle & upper classes can better deal with such a situation.

What can we do to reduce inflation?

It is the regulators who control inflation through major macroeconomic levers. It is therefore central banks and governments that can act and they do so in various ways (as an example, we use the context of the War in Ukraine in 2022):

They raise interest rates: when inflation is too high, central banks raise interest rates to slow down the economy and bring inflation down. This is what the European Central Bank (ECB) has just done because of the economic consequences of the War in Ukraine. The economic sanctions have seen the price of energy commodities soar, which has pushed up inflation.

Blocking certain prices: This is what the French government is still doing on energy prices. Thus, in France, the increase in gas and electricity tariffs will be limited to 15% for households, compared to a freeze on gas prices and an increase limited to 4% for electricity in 2022. Without this “tariff shield”, the French would have had to endure an increase of 120%.

Distribute one-off aid: These measures are often considered too costly and can involve an increase in salaries.

Bear in mind that “miracle” methods do not exist, otherwise inflation would never be a subject discussed in the media. However, these three methods are the most used by governments and central banks but only time will tell us whether they succeed.

Figure 1. Inflation in France.

Source: Insee / Les Echos.

Useful resources

Inflation rates across the World

Insee’s forecast of the French inflation rate

About the author

The article was written in October 2022 by Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023).

The abandonment of the TF1-M6 merger: what happened?

November 1, 2022 by Louis DETALLE

The abandonment of the TF1-M6 merger: what happened?

In this article, Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023) explains how the fusion of the 2 biggest French TV companies has failed…

What was planned & why?

It was in May 2021 that the project to bring together the two French television channels was announced. On the one hand, TF1, whose 2020 turnover exceeds 2 billion euros; on the other hand, M6 with a turnover of 1.2 billion euros.

In the context of the loss of speed of French television channels in the face of fierce competition from the multiplying streaming platforms such as Netflix, Disney+ and Prime Video, the two television groups had deemed it strategic to come together in a giant merger.

Indeed, if we look at TF1’s revenues in 2020, they may reach more than €2 billion, but this means a notable drop of €256 million compared to 2020, i.e., a drop of 11% in its turnover.

It is therefore in a context of loss of market share that the two French television giants announced their desire to merge. A merger would have enabled these two players to combine a total of 40% of the television audience and 70% of the television advertising market.

This risk of an ultra-dominant position in France was also the source of complications for the two groups, which estimated that they could achieve economies of scale of nearly €300 million.

What happened after the announcement?

Well, after the announcement, the French Competition Authority (l’Autorité de la concurrence in French) announced that it had started a report on the consequences of a potential merger between the two groups.

The result of this report was made known on July 27, 2022: the TV channel groups were asked to divest themselves of some of their larger channels to satisfy the market monopoly issues.

According to this report, it was suggested that the M6 group should, for example, have divested itself of the M6 channel as well as TFX, 6Ter and Paris Première, which was not possible. The Directorate-General for Competition, Consumer Affairs and Fraud Control suggested to the competition authority that the new entity should sell W9 or TMC.

Why haven’t M6 & TF1 accepted to sell some TV channels?

First of all, at the beginning of the announcement of the merger project, the management of the two groups argued that their so-called hegemony on the television advertising market was non-existent.

One of their strong arguments was to point out that the market to be considered was not only that of television advertising, but rather the market for advertising on broadcasting platforms. This market would then effectively include television but also advertising on streaming sites or on-demand content platforms.

This argument was rejected by the competition authority, which considered that the market to be considered remained that of French television advertising and that an entity with 75% of the market share was therefore unthinkable, which is why TV channels had to be sold.

Useful resources

Autorité de la concurrence

Group M6’s website

Group TF1’s website

About the author

The article was written in October 2022 by Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023).

What are LBOs and how do they work?

November 1, 2022 by Louis DETALLE

What are LBOs and how do they work?

In this article, Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023) explains why LBOs are so trendy and what they consist in.

What does a LBO consist in & how is it built?

LBO stands for a Leverage Buy-Out. It means a company acquisition which is funded with a lot of debt. Often, when an LBO is performed, 70% of the funds used for the acquisition come from debt, the 30% left being equity.

Figure 1. Schematic plan of the organization of an LBO.

Source: the author.

To perform an LBO, the company wishing to buy the company called Target in this example will have to create a Holding company specially for this purpose. The holding will then take on some debt with specific lenders (banks, debt funds) under the form of loan or bonds. After that, the holding will have both some initial equity from the company wishing to acquire Target and some debt to buy Target.

What happens after the target has been bought?

Well, after the target has been bought, since the target company has an operating activity which motivated the acquiring company to buy it, this means that the target company had great financial performance. And it better to be the case! Otherwise, the large amount of debt taken for the operation will never be reimbursed to the lenders.

The principle is that target’s financial cash flows will be redistributed to the holding in the form of dividends, and the holding will use these dividends to pay back the debt to the lenders until all debt is reimbursed.

What makes a company a good LBO target?

A good LBO target should respect a few conditions related to the target company: important operating cashflows, a mature market, A company whose development cycle is over.

Important operating cashflows

First & foremost, without great cashflows, the holding will never be able to reimburse the debt taken with the dividend if they are insufficient. For that matter, the company targeted for the LBO should have both regular & important cashflows.

A mature market

When looking at the bigger picture, the company willing to acquire a target with a LBO must make sure that the market in which the potential target evolves is stabilized. Because LBO means major financial risk due to the amount of debt involved, a company cannot also add operational risk.

A company whose development cycle is over

Once again, the target company will ensure the reimbursement of a high debt. This is why all capital expenditures (CAPEX) and major investments such as machines, fleets of vehicles should have been already done.

Useful resources

Vernimmen’s book chapters on LBOs

Youtube video on a LBO Case Study

About the author

The article was written in October 2022 by Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023).

A quick presentation of the Asset Management field…

May 30, 2022 by Louis DETALLE

A quick presentation of the Asset Management field…

In this article, Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023) explains what does an Asset Management company consists in.

What does Asset Management consist in?

Asset management is a financial activity whose objective is to create, manage, grow and maximize the benefits of financial products or investments entrusted by companies or individual investors. Asset management therefore consists in managing a client portfolio and increasing its profitability by balancing expected returns and risks in order to achieve previously defined objectives.

When thinking about asset management, companies such as Allianz, Amundi, AVIVA or Natixis Investment Managers could be quoted as examples of Asset Management companies.

What are the main clients of Asset Managers?

The main clients of asset management companies are :

– Companies wishing to invest their cash surpluses;
– Pension funds and mutual insurance companies;
– Financial institutions investing for their own account;
– Banks and insurance companies that distribute financial products to their clients (retail, private and corporate banking).

Two main types of management

Management under mandate

The company manages the account of a single client or a group of clients who have delegated the management of the fund to it. All of the fund’s assets belong to one person or to a small number of people,

Collective management

A fund with a large number of investors and units. It is managed according to the same strategic orientation corresponding to the profile adapted to these investors.

What does an asset manager work on?

The day-to-day work consists mainly of assessing how the previous day’s transactions and market movements have affected the portfolio’s risk profile in terms of liquidity, credit and market.

Another key aspect of this job is the development, adaptation and improvement of quantitative portfolio risk analysis tools. Other tools to assist investment decisions, to monitor developments in financial research in terms of risk and to analyze macroeconomic news require more specific attention and are therefore more complex to implement.

Useful resources

Thinking ahead Institute The world’s largest asset managers – 2021

About the author

The article was written in May 2022 by Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023).

Reuters

May 30, 2022 by Louis DETALLE

Reuters

In this article, Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023) explains everything there is to know about Reuters, the international giant in the data-providing market…

Quick presentation of the company

Thomson Reuters is a leading provider of business information services. As one of the main competitors of Bloomberg, their products include highly specialized information-enabled software and tools for legal, tax, accounting and compliance professionals combined with the world’s most global news service – Reuters.

Reuters is organized in 5 different business units:

Legal Professionals: This business unit serves law firms and governments with research products, focusing on intuitive legal research powered by emerging technologies and integrated legal workflow solutions that combine content, tools and analytics.

Corporates: Designed for corporate customers from small businesses to multinational organizations, this business unit provides its clients with a full suite of content-enabled technology solutions for in-house legal, tax, regulatory, compliance and IT professionals.

Tax & Accounting Professionals: This business provides its customers with research that focuses on intuitive tax offerings and automating tax workflows.

Reuters News: Supplies business, financial and global news to the world’s media organizations, professionals and news consumers through their many platforms.

Global Print: Provides legal and tax information primarily in print format to customers around the world.

Type of people working at Bloomberg (types of jobs)

Nearly 2/3 of Reuters’ employees work in the US, the remaining third working in Asia and in Europe. The careers available at Reuters are therefore numerous and very diverse.

Indeed, the profiles needed by Reuters consists in legal professionals, corporate professionals, tax & accounting professionals and journalists. Thomson Reuters also employs many software designers to help design the Reuters’ terminals, as well as sectorial legal and corporate specialists in order to provide precise and adequate analysis.

Main competitors

As Thomson Reuters’ activities are very diverse, we will classify the main competitors of the firm in respect to the activities.

For Thomson Reuters’ business that consists of software-design, Bloomberg LLP is the most natural competitor in this space with its very famous Bloomber Terminal. The terminal business is built on a fantastic technology platform that provides comprehensive financial information. There are other competitors, such as Dow Jones Industrial Average FX Trader, which have specialized in one type of industry whereas Reuters and Bloomberg remain generalists.

Reuters’ editorial branch’s main competitors would be Bloomberg News, the Financial Times (FT), the Wall Street Journal, and other traditional financial news companies. The same goes for their TV/radio operation (their competitor would be CNBC).

Use of data in financial markets

In addition, as Bloomberg acquires many of his competitors, such as BNA and BusinessWeek, this contributes to curbing the number of data providers and improving the monopoly of Bloomberg on the data-providing market. Reuters struggles to keep up the pace of its competitor which is very well established in this market.

Useful resources

Bloomberg

Reuters

About the author

The article was written in March 2022 by Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023).

A quick presentation of the Private Equity field…

May 15, 2022 by Louis DETALLE

A quick presentation of the Private Equity field…

In this article, Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023) explains what does an M&A daily life looks like.

What does Private Equity consist in?

Private Equity, represents fundamental and indispensable funding-support throughout the life cycle of the company.
Private equity consists in taking (minority or majority) stakes in the capital of (small or medium) companies which are generally unlisted on the stock exchange. It is therefore a method of financing companies in order to support them on the path to growth in the relatively short term. Indeed, the objective of the private equity fund is obviously to realize a capital gain at the exit, after 5 to 8 years in general, the time for the invested capital to generate a return on investment.

What are the main categories of Private Equity?

Venture capital

This type of capital investment is mainly aimed at small businesses/start-ups. Its target is to launch the activity of a company in the creation or start-up phase. Indeed, for a start-up, it is often difficult and premature to call on bank loans that follow very specific and very standardized covenants.

Development capital / growth capital

It aims at entering the capital of a company that has reached a certain maturity and profitability. The funds collected will then be used for internal and external growth: respectively the development of the company’s offers in order to develop its activities or the acquisition of competitors.

Turnaround capital

This type of capital investment aims at restructuring a company in difficulty. The call for bank financing having generally become impossible when the company experiences a major crisis, the turnaround capital fund will enter the capital to allow the company to reconnect with profitability and profits.

Transmission capital

This mode of capital entry is observed when a change of owner occurs. The objective is to ensure the gradual transition and preserve the profitability of the company. Traditionally, the LBO “leveraged buy-out” or the LMBO “leveraged management buy-out” is used, i.e. its buyout by the debt of a holding company constituted especially for the occasion.

What does an analyst in private equity work on?

The tasks of a Private Equity analyst are diverse and include, for example, the producing and challenging a business plan, modelling different scenarios and strategies in Excel. The analyst and the investment teams of the private equity teams thoroughly analyze the companies seeking for funding. They try to determine whether the projections of the seeked investment are reasonable and not overestimated. Indeed, bear in mind that private equity funds intend to fund companies trough equity. And as equity investors (shareholders) are reimbursed at last in the event of a bankruptcy, their work is to determine if the company will really generate growth with the capital at stake. That’s why deep sector-analysis are also required from a private equity analyst.

About the author

The article was written in April 2022 by Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023).

A quick presentation of the M&A field…

May 15, 2022 by Louis DETALLE

A quick presentation of the M&A field…

In this article, Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023) explains what does an M&A daily life looks like.

What does M&A consist in?

Mergers & Acquisitions (M&A) is a profession that advises companies wishing to develop their external growth, i.e. growth through the acquisition of a company or through a merger with it. M&A mandates are therefore carried out on the side of the company that wishes to acquire another company, “buy-side”, or on the side of a company that wishes to be acquired, “sell-side”.

What does an analyst work on?

The tasks of an M&A analyst are diverse and include, for example, drawing up a business plan, modelling different scenarios and strategies in Excel, and drafting information memorandums (IMs) on the various deals in progress. All these skills are then widely used for the mergers and acquisitions of companies, in the development of their external strategy, in their financial evaluation or in the analysis of databases. Overall, M&A allows you to move into any sector of finance and this is part of the reason why it is so attractive.

Why does M&A jobs appeal so much to students?

First of all, it is the dynamic working atmosphere that investment banking enjoys that also attracts young graduates. M&A is indeed marked by a culture of high standards and maximum commitment, with highly responsive teams and extremely competent colleagues. Working in a quality team is very stimulating, and often makes it possible to approach the workload with less apprehension and to rapidly increase one’s competence. The remuneration is also much higher than in other professions at the beginning of a professional career for a young graduate and it progresses rapidly. Finally, it is also the exit hypotheses that attract young M&A analysts.

What are the main exits for M&A?

Most professionals who started out in M&A move on to other types of activities where experience in this sector is required. This is particularly the case in private equity. After advising companies on their growth and expansion projects, the young investment banker has all the tools needed to work in investment funds. The skills are indeed transposable to the financial and strategic questions that private equity funds ask themselves in order to obtain a return on investment.

Switching to alternative portfolio management (hedge funds) is also a possibility. Hedge funds can invest in different types of assets such as commodities, currencies, corporate or government bonds, real estate or others. As a former M&A analyst, you have the skills to analyse the market and determine the assets that seem to be the most appropriate and profitable.

Finally, some former M&A bankers switch to corporate M&A, which involves determining which companies or subsidiaries the company should buy or sell. This can be a very interesting area as you have the opportunity to follow the acquisition of a company from start to finish and therefore take a long-term view of the company’s strategy.

Useful resources

Décideurs magazine Rankings for M&A banks in France (league tables)

About the author

The article was written in May 2022 by Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023).

A quick overview of the Bloomberg terminal…

April 11, 2022 by Louis DETALLE

A quick overview of the Bloomberg terminal…

In this article, Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023) explains everything there is to know about the Bloomberg terminal which is a must-know in finance.

How to use the main functions of the Bloomberg terminal?

One may notice that the keyboard of the Bloomberg terminal is a little strange. Indeed, this keyboard called Starboard, and contains red, blue, green and yellow keys for specific functions in addition to your regular keys.

Functions are unique Bloomberg applications that provide analysis and information on securities,
sectors, regions and more. Each function is accessed by typing in its unique mnemonic (a short, memorable name) and then pressing the key located in the lowest-right sided area of the keyboard.

Let’s review together the different functions of the buttons:

The HELP button is perhaps the most useful button for those just starting out. If you have questions about anything on the terminal, simply press the button once and a Bloomberg specialist will be there to start a live chat with you to resolve your questions.

In order to benefit from the latest news, users can simply type NEWS and press enter to get the latest information on market trends, movements and other relevant news.

Those in the finance industry chat via Bloomberg Messaging, which is essentially equivalent to Facebook Messenger but on Bloomberg. It enables you to send a message to anyone on the device. This means that anyone in the industry can technically contact each other instantly. No need to ask for someone else’s number or find out the best way to get in touch.

Main users of the Bloomberg terminal

Traders, brokers, analysts, portfolio managers, investors and executives are the Terminal’s primary consumer base as they need to access the data provided by Bloomberg easily in order to do their job.

A subscription to the Bloomberg Terminal costs approximately $20,000 a year, but that does not stop its customers from renewing their subscriptions because of its usefulness.

Training webinars

First and foremost, the Bloomberg beginner should work on the document available on Bloomberg website, Getting started on the Bloomberg Terminal, which will give you the main information on the keys and their function.

The best next step to get used to the Bloomberg Terminal is to complete the certification
course: Bloomberg Market Concepts (BMC). BMC is an 8-hour e-learning course that will
provide a visual introduction to the financial markets and covers nearly 70 Terminal functions which is enough for whoever wants to start using Bloomberg.

Useful resources

Bloomberg’s website

Capital Markets (BMC) Certification’s website

About the author

The article was written in April 2022 by Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023).

Bloomberg

April 11, 2022 by Louis DETALLE

Bloomberg

In this article, Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023) explains everything there is to know about Bloomberg LP, the international leader in the data-providing market…

Quick presentation of the company

Bloomberg LP is an American financial group specialized in services to financial market professionals and in economic and financial information. Bloomberg operates as a news agency and via numerous media such as TV, radio, press, internet, and books. The company was founded in 1981 by Michael Bloomberg, former mayor of New York City.

In its early days, Bloomberg LP’s activities were only based on the exploitation of a historical database of US Treasury yield curves, bought by the founder to its former employer, the investment bank Salomon Brothers. After that, the company added on its terminals a messaging system, retransmissions of financial assets’ prices and developed financial news flows long before the watershed of Internet.
In 1990, Michael Bloomberg installed his 1,000th terminal.

Type of people working at Bloomberg (types of jobs)

The careers available at Bloomberg LP are numerous and very diverse. The Board’s needs in terms of employees mainly consist of software designers to help design the Bloomberg’s terminals, sectorial financial specialists in order to provide precise and adequate analysis.
Finally, the last kind of profiles that Bloomberg needs are journalists and more broadly, people with great writing abilities since Bloomberg LP produces a huge flow of written articles every day. Bloomberg News for instance (one of many Bloomberg LP’s subsidiaries) has over 10 000 employees which gives an idea of the written flow emitted by the company.

Main competitors

As Bloomberg’s activities are very diverse, we will classify the main competitors of the American firm in respect to the activities.
For Bloomberg’s core business, which is the terminals, Thomson Reuters is the most natural competitor in this space (with products like Kobra, Eikon, D3000). The terminal business is built on a fantastic technology platform that provides comprehensive financial information. There are other competitors, such as Dow Jones Industrial Average FX Trader, which have specialized in one type of industry whereas Bloomberg remains a generalist.

Bloomberg’s editorial branch’s main competitors would be Reuters, the FT, the Wall Street Journal, and other traditional financial news companies. The same goes for their TV/radio operation (their competitor would be CNBC).

Use of data in financial markets

Useful resources

Bloomberg

Thomson Reuters

About the author

The article was written in March 2022 by Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023).

Understand the importance of data providers and how they influence global finance…

March 24, 2022 by Louis DETALLE

Understand the importance of data providers and how they influence global finance…

In this article, Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023) explains the importance of data providers and how they influence global finance…

What are data providers?

A data provider is an intermediary between data and data users. Indeed, a data provider provides market data to financial firms, traders, and investors. The data distributed is previously gathered, organized and presented in an understandable way. Data providers collect the data from sources such as stock exchange feeds, brokers’ notes and dealer desks or regulatory filings. Some names will definitely ring a bell, such as Bloomberg, Thomson Reuters whereas some others will be less known as Moody’s Analytics.

The different types of data that are exchanged for financial purposes

When it comes to data used in finance, trading rooms are the best example as they contain almost nothing but data. Indeed, transaction prices, traded volumes of stocks and bonds are displayed at all times. But trading rooms are only one specific of example of data’s use in finance.

As mentioned, there are many different types of instruments (e.g., stocks, bonds, currencies, funds, options, futures, etc.) and hundreds of financial markets for investment, which leads to an extremely large flow of data exchanged.

The types of data offered vary by data provider. Generally, they cover information about companies and financial instruments (options, shares, bonds, treasury bonds and currencies) which companies might trade or issue.

The data can be updated every day or several times a day! Intraday data for instance are prices provided throughout the day and are usually released on a continuous basis.

The main dynamics of the Data Providers’ market

The explosion of financial data, enabled by the Internet tremendous potential, caused an explosion of demand for financial data. As evidenced in 2006 by the British mathematician and Tesco marketing mastermind Clive Humby’s quote, “Data is the new oil”, the data providers enjoy a market that seems to be limitless. Indeed, as data provider raw material’s amount is ever-increasing, it appears they will thrive for decades.

In addition, the market seems to be detained by only a few actors among which Bloomberg that acquired BNA and BusinessWeek. This contributes to curbing the number of data providers and improving the monopoly of Bloomberg on the data-providing market. Let’s review the market shares of the 4 major data providers: Bloomberg enjoys a comfortable 33,4% market share, Refinitiv Eiken follows with a 19,6% share of the market, Capital IQ has a 6,2% market share when FactSet closes the ranking with 4,5% of the market. (source:https://www.wallstreetprep.com/knowledge/bloomberg-vs-capital-iq-vs-factset-vs-thomson-reuters-eikon/)

Useful resources

About the author

The article was written in March 2022 by Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023).

The importance of data in finance

March 24, 2022 by Louis DETALLE

The importance of data in finance

In this article, Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023) explains the importance of data-management for corporations and how they are used to improve profitability.

According to a study published by CapGemini untitled: The data-powered enterprise: Why organizations must strengthen their data mastery, it is estimated that the gain from efficient data-management would represent 22% in terms of firm profitability.

Why is data used?

The use of data in finance can also be very useful in finance for various reasons.

Indeed, the multitude of data available allows for a deeper understanding of the market in terms of risks and opportunities. This knowledge is accompanied by an important consideration of political, social and economic factors.

As early as 2006, British mathematician and Tesco marketing mastermind Clive Humby stated “Data is the new oil.” The companies with the largest market capitalizations also bear witness to this importance of data. The ranking shows of tradingstat shows a podium of Apple, Microsoft and Google: the predominance of data-driven companies is clearly observable here.

In which finance-related fields is data used?

In finance, it is especially in the trading rooms that data has become an absolutely indispensable tool. Indeed, it is thanks to Big Data – i.e. increasingly exhaustive data, at an ever faster pace – that high frequency trading has been developed. In short, high-frequency trading makes it possible to place several thousand buy and/or sell orders in a few seconds, or even milliseconds, while optimizing risk management in order to adapt the strategy to market responses. This trading strategy allows for buying and selling in a sufficiently short period of time to avoid a potentially negative market movement during the operation.

On the other hand, retail banks (i.e. banks for individuals) are also confronted with the challenges of data-management. The development of online services offers them a better knowledge of their customers, which leads to a change in the bank’s relationship with its customers. In doing so, banks improve their ability to adapt their offer to the customer profile. Big Data also enables banks to fight fraud. Banks are now able to monitor all bank card transactions and be alerted when a user makes a payment (particularly in terms of amount, time or geographical area). For investment banks, whether it is the implementation of a more reliable scoring of credit files, the pooling of data between banks, analysis of the “sentiment” of investors for traders or the compliance of data and its processing, the indispensable character of data is no longer to be proven.

The importance of data regulation though

The use of data in finance is very useful but can be problematic when the data concerns the personal data of users or customers. In this context, financial actors are subject to ever increasing regulation and the adoption of the EU’s GDPR, in 2016, seems to be a step in this direction.

Useful resources

BlackRock L’utilisation du Big Data dans un processus d’investissement

About the author

The article was written in March 2022 by Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023).

The incredible story of Nick Leeson & the Barings Bank

March 17, 2022 by Louis DETALLE

The incredible story of Nick Leeson & the Barings Bank

In this article, Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023) looks back at the bank fraud of Nick Leeson, a trader at Barings, which led to the collapse of the UK’s oldest investment bank…

History of Barings and Nick Leeson’s background

Barings was founded in 1762 in the UK, making it the oldest British bank, so renowned and prestigious that even the Queen of England was a client. It is therefore in this renowned institution that Nick Leeson will pursue his career after a spell at Morgan Stanley as an operations assistant. Ambitious and ready to do anything to make a name for himself within this prestigious institution, Nick Leeson multiplies risky operations and gradually climbs the ladder, greeted by a management admiring his results considering his young age.

The great fraud

In 1990, Barings chose Nick Leeson to head up the management of its Singapore subsidiary. Having spotted a flaw in the system for monitoring the compliance of traders’ market operations, Nick Leeson carried out speculative operations that were normally unauthorised and that brought in a lot of money for Barings. Nick Leeson was therefore engaged in a series of successful speculative trades, which is why management did not look into the matter. However, the day comes when the trader’s luck runs out: he makes bigger and bigger losses, as he hopes to make up for previous losses with each new trade.

With the trade tracking loophole still in use by Nick Leeson, he hides the losses from the failed trades in an error account, 88888. Nick Leeson also concealed documents from the bank’s auditor and continued to trade with losses accumulating over time. By the beginning of 1995, these losses reached £210 million, which represented half of Barings’ capital.

Eager to wipe out these very large losses, on the evening of January 16, 1995 Nick made a colossal trade – $7 billion – betting that the Nikkei would not fall overnight. Normally this would be considered a low-risk trade, but on the evening of 16 January an earthquake struck Kobe. On the morning of January 17, the Nikkei price collapsed and so did the trader’s positions.

Nick Leeson tried to make up for it by trying to make a quick recovery in the Nikkei, but this did not happen. Nick’s losses reach an abysmal $1.4 billion, which is twice the bank’s capital. Despite Nick’s ability to circumvent the bank’s internal controls, the level of losses is such that his entire scheme is uncovered. And the bank, faced with such losses, is forced to declare bankruptcy.

Conclusion

In conclusion, it was a major error in the compliance system that caused the Barings bankruptcy. Nowadays, enforcers can no longer supervise the tasks entrusted to them, and this is all the more true in banks where brand new departments have been created since the 2000s with the rise of compliance and banking regulation.

Useful resources

Mousli M. (2015) Quand un trader fait sauter une banque : Nick Leeson et la Barings L’Économie politique 68(4) 89-101.

Comprehensive history of the Barings bank

About the author

The article was written in March 2022 by Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023).

What happened between Bruno Iksil & JP Morgan

February 5, 2024March 17, 2022 by Louis DETALLE

What happened between Bruno Iksil & JP Morgan

In this article, Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023) explains how Bruno Iksil, a French trader working in London made inconsiderate trades in the name of the renown JP Morgan.

Bruno Iksil: background of a French trader based in London

Bruno Iksil, known as “The Whale”, is a French trader well known in London financial circles. A former student of Centrale Paris, this former Natixis employee built a reputation at JP Morgan for the size of the orders he placed. Bruno Iksil worked on the Credit Default Swaps (CDS) market, financial products that provide insurance against the non-repayment of loans.

Iksil’s activities at JP Morgan

Bruno Iksil’s reckless trading initially made JP Morgan Chase a lot of money, almost $100 million. His ability to succeed brilliantly in times of crisis and his boldness in business were praised and rewarded on numerous occasions by management, which made Iksil the highest paid trader in London. According to the Wall Street Journal, in recent years Bruno Iksil earned around $100 million a year at JPMorgan’s chief investment office (CIO).

And his nickname, linked to the enormity of the commitments he was making, was regularly on the front page of all the newspapers, along with the new positions taken by ‘The Whale’.

JP Morgan’s losses

Bruno Iksil was suspected of being involved in a colossal loss by JP Morgan Chase. According to the latest estimates, the risky bets of the Frenchman and his colleagues cost JP Morgan Chase 5.8 billion dollars. This triggered a real storm in the life of the trader who, according to the British journalist The Guardian, left the company.

Following the losses incurred by the American bank, Jamie Dimon – the Chief Executive Officer – had announced losses amounting to 2 billion dollars. In fact, nearly 4.4 billion dollars were lost as a result of the Whale’s operations.

Following these announcements, the bank’s market capitalization plunged by 25 billion dollars as the stock dived by 9%.

Conclusion and aftermath of the affair

The whale affair brought to light accusations of negligence against the bank, particularly in its internal controls. The risky positions in credit derivatives that Bruno Iksil and many other banks regularly took contributed to the subprime crisis. As a result, JP Morgan was fined $1 billion by the British and American authorities, on behalf of its management that enable the Whale to invest so much on financial markets.

Useful resources

Philippe Bernard (13/07/2015) A Londres, Bruno Michel Iksil échappe aux poursuites Le Monde.

JP Morgan

About the author

The article was written in March 2022 by Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023).

What are the different financial products traded in financial markets?

What is a financial product?

What are the three most simple types of financial products?

Shares

Bonds

Foreign exchange

What are the other types of financial products?

Options

A special case: the Stock Options

Related posts on the SimTrade blog

Resources

About the author

A quick review of the DCM (Debt Capital Market) analyst’s job…

What does DCM consist in?

Why would a company resort to DCM rather than ECM?

What does an analyst in DCM work on?

Commercial relationship

Structuring

Syndication

Why do DCM jobs appeal so much to business school students?

Resources

Related posts on the SimTrade blog

About the author

Focus on the General Inspection in banks

What is the General Inspection?

What banks recruit General Inspectors and how does the recruitment process go?

What are the main exits for General Inspectors?

Related posts on the SimTrade blog

Resources

About the author

The different legal types of companies in France

What are the main legal forms of companies that someone can create in France?

The limited liability company (Société à Responsabilité Limitée or SARL)

The one-person” limited liability company (“Entreprise unipersonnelle à responsabilité limitée” or EURL)

The simplified joint stock company (“Société par Action Simplifiée” or SAS)

The public limited company (“Société Anonyme” or SA)

General partnership (“Société en nom collectif” or SNC)

What are the main characteristics that must be borne in mind when creating a company in France?

SAS vs SA

SARL advantage: limited liability

SNC

EURL advantage: protecting your personal capital

Related posts on the SimTrade blog

Useful resources

About the author

A quick review of the ECM (Equity Capital Market) analyst’s job…

What does ECM consist in?

What does an analyst work on?

Why does ECM jobs appeal so much to students?

What are the main exits for ECM?

Resources

Related posts on the SimTrade blog

About the author

What are the missions of the financial departments of CAC40 groups?

What is the use of the Finance Department?

What are the main topics that the Financial Department deals with?

What is interesting and demanding as a CAC40 CFO?

Related posts on the SimTrade blog

Resources

About the author

A quick presentation of the Restructuring job…

What does Restructuring consist in?

What does an analyst in Restructuring work on?

What is interesting & demanding in Restructuring?

Related posts on the SimTrade blog

Useful resources

About the author

Understand the mechanism of inflation in a few minutes?

What is inflation and how can it make us poorer?

How is the inflation computed and what does a x% inflation mean?

What can we do to reduce inflation?

Useful resources

Related posts on the SimTrade blog

About the author

The abandonment of the TF1-M6 merger: what happened?

What was planned & why?

What happened after the announcement?

Why haven’t M6 & TF1 accepted to sell some TV channels?

Useful resources

Related posts on the SimTrade blog