The formation of Bank of America Corp created the fourth-largest derivatives program among banking companies, but that was just a starting point for managing director William Fall.
Mr. Fall, who heads the company's global derivatives group, is adding people and offices to capture market share in the arcane and profitable business of selling financial hedges to corporate clients. "We're definitely in a growth mode," he said.
Since the merger last Sept. 30 of BankAmerica Corp. and NationsBank Corp., the company has opened derivatives units in Tokyo and Australia. It is also looking very closely at opening a unit in Bombay, Mr. Fall said. He said he wants to set up shop in parts of the country and the world where Bank of America already has commercial banking operations. The company has untapped opportunities, he said, in such markets as Italy and Spain, where Bank of America is already a household name.
Derivatives are financial contracts whose values are determined by the performance of an index or asset. Usually the contracts are meant to counter-perform the bank customers' holdings, protecting them from volatile interest rates, currency swings, and fluctuating asset prices. Derivatives take the form of swaps, options, forward contracts, and other structured securities.
Treasurers, corporate finance officers, hedge fund managers, and portfolio managers all commonly use derivatives to offset their risks.
Profits are hard to pin down, but analysts say derivatives produce billions of dollars of revenue for banks' trading and capital markets units.
With $4.265 trillion of notional value for its outstanding derivatives contracts, Bank of America ranks behind leader Chase Manhattan Corp., $10.5 trillion; J.P. Morgan & Co., $8.325 trillion; and Citigroup Inc., $7.443 trillion, according to Veribanc, a banking research firm in Wakefield, Mass. Notional value is the total of the underlying indexes and assets used to calculate payments under the derivatives contacts; the amounts at risk from the contracts, though substantial, are much less.
"Generally these operations are very profitable," said Raphael Soifer, a banking analyst at Brown Brothers, Harriman & Co. "There are risks involved,'' but the operations try to build in safeguards to keep themselves from becoming too exposed.
Mr. Fall said he sees opportunities in the United States within companies that already bank with Bank of America. "Internally, we're marketing pretty hard to make sure our people are aware" of the program, he said.
The idea is to offer derivatives to customers as a new product or in tandem with a financial service the customer is already receiving, Mr. Fall said.
Bank of America operates its derivatives programs in the United States and in several foreign countries, with Chicago as headquarters and 425 salespeople, traders, and researchers in various offices. The largest unit is for North American operations, which account for two-thirds of revenue, he said.
Mr. Fall has four executives reporting directly to him, two from NationsBank and two from BankAmerica. "Both of us were quite big before," said Mr. Fall, who worked for the old BankAmerica. "It's been a question of going to each side of the business and squeezing out the best."
Teams within the derivatives program align themselves with industries such as real estate and utilities.
Executives declined to discuss profits, but Mr. Fall did say that the business done so far this year outpaces all the business that was done in 1998, when the two companies were separate.
Bank of America "has a formidable program," said David Stumpf, a banking analyst at A.G. Edwards in St. Louis.
Mr. Fall said there is not very much overlap in the merger because Bank of America's derivatives unit was strong in dealing with very big companies and overseas businesses, NationsBank with middle-market firms. NationsBank and Bank of America each brought business lines to the table that the other didn't have, so there was opportunity for internal growth, Mr. Fall said.
"We put the two units together and found a good overall fit," he said. "We just made the whole business that much more global."
As for extra people, "you want to select the strengths of the predecessors, or group," Mr. Fall said. "We took the merger of our two units slowly. This allowed us to identify people where there was overlap."
Some overlapping units were shuttered, with an eye toward keeping things even. For instance, the company closed a Seattle operation that had been run by BankAmerica and a unit in Dallas that NationsBank had operated, Mr. Fall said.