Commerzbank Sets Up Derivatives Sub To Give Its Traders 'More Flexibility'

Commerzbank has announced plans to set up a separate subsidiary to handle derivatives trading for the bank. Treasury and capital markets director Rudolph Duttweiler says he will be one of two co-executive directors of the new subsidiary. The other, he says, will be Antoine Paille, who was previously at Société Générale, where he founded the French bank's derivatives unit.

Duttweiler says the subsidiary - guaranteed by the bank and given the same AA rating - does not have the same mission as those triple-A subs set up by several U.S. investment banks, since Commerzbank already has the financial muscle successfully to trade derivatives on its own. The aim of the new sub, he says, is to "combine the advantages of an integrated derivatives unit and the flexibility of a separate legal entity."

As Duttweiler explains it, although the sub will be a separate company under German law, it will operate as a unit within the bank's treasury and capital markets group, reporting to him. However, the separate legal status will free the unit from some of the more cumbersome approvals from the Commerzbank directors now necessary to conduct most transactions.

"The bank itself requires a lot of coordination - the organisation is geared up to run 1,000 branches. There is a lengthy process of agreements to pass each single thing, but each decision is implemented throughout the branch network," says Duttweiler. "Here we have a single unit with a specific task; derivatives move fast and you have to respond fast."

Nonetheless, he didn't want derivatives totally separated from the rest of the division - it would have to have its own board of directors in that case, and a complete separation would defeat the point of an integrated treasury and capital markets operation, he says.

Duttweiler will have a double function as both a co-director of the unit and its ultimate supervisor. He says he will handle administration, personnel and risk control, while Paille will head trading, sales and market risk management.

Duttweiler says the new sub will have three lines of business: foreign exchange derivatives (including options), interest-rate derivatives and equity derivatives. "Basically it will trade everything that is over-the-counter," he says.

In foreign exchange, the new unit will be implementing the bank's plans for a global book in options by the end of the year, says Paille. It will be based in Frankfurt, New York and "a place in Asia not yet determined."

The new sub will take four or five months to gear up, says Duttweiler, and staff numbers, currently about 50, will likely eventually quintuple to some 250 over the course of the next year or so, he says. Commerzbank has already hired Arie Assayag from Citibank in New York, where he was head of foreign exchange derivatives. He was previously head of Société Générale Options Chicago which closed down last year, say market sources.

Alain Dutronc, head of the FX derivatives product group at Société Générale in Paris and the U.S., has also joined the bank. According to Paille, the two are "helping to set up the new subsidiary." Other recruitment is in progress, says Paille.

Although the Frankfurt staff of the new subsidiary will be located in the Commerzbank trading room, as is the current derivatives group, Duttweiler says it will have its own systems, its own administration and its own risk-management people. Nonetheless, says Duttweiler, "we must have a coherent policy on risk management for the whole division."

Paille says no firm decisions have yet been made about new technology for the derivatives unit. "The basics for the new subsidiary are still being worked out," he says.