WHOLESALE COMMODITY BROKERS
over the last 5 years as it has expanded its base from North America to Europe. Loya sees their physical presence in Asia as a natural next step. Commodity trading and risk management
presents different challenges, tools and strategies than in traditional assets. This makes the skill-sets required in particular commodities more demanding than those found in capital or FX and money markets. In commodity markets supply factors are often more important in price formation than demand, and the delivery element in many transactions introduces a whole new set of risks to manage dynamically, making the pricing matrix more complex. Meanwhile, the markets continue to
expand. “There are many more customers today in the energy and commodities space with an increasing number of trades being cleared,” explains GFI Group’s Patricia Gutierrez. The development of financially settled contracts and increasing physical business flows has spurred an expanding customer base in the last ten years with commodities as an asset class firmly established [see box opposite]. In this expanding customer arena, IDBs
are the ‘colour providers’. Commodity- focussed Marex Spectron also sees this growth in activity continuing as long- term and off-take agreements give way to shorter-term pricing. “This opens new markets presenting new opportunities to all participants,” explains Gordon Bennett, Managing Director of OTC markets. Commodity markets often start life as a
fixed benchmark pricing structure. Then they progress towards shorter duration pricing. This introduces the hedging aspect (yes, and speculative trading), attracting liquidity and financially settled products. This unwinding of longer-term pricing mechanisms – as seen in sectors such as gas and electricity and now appearing in iron ore, steel and freight – is the “sweet-spot” for wholesale commodity brokers in a full service firm according Richard Frape, Director of Market Services atMarex Spectron. “It’s where we can add real value – as a catalyst to liquidity, market development and price discovery.”
Adapting to Circumstance The issue of clearing in financial markets is being given
weight by legislation in Europe and North America. The newly established regulatory frameworks for OTC derivatives will have significant effects for some commodity market participants but it is not the watershed some present. “We’ve been living in a cleared world for some time,” says Bennett, alluding to developments in commodity markets post-Enron. This event
moved much counterparty risk to the clearing houses (CCPs). As such, “The energy market had its 2008 in 2001,” he explains. Energy and commodity markets
are ahead of the regulatory game and the IDBs have long established links and services for clearing trades. The recently announcedCME Direct is another example. “Having the CME provide and maintain technology for the global provision of tradable markets on a hybrid model, with full Clearing and STP, is a very compelling development for the oil market,” according toMichael Anderson at Tradition. This initiative was born of traders wanting to see aggregated liquidity from the key
June 2012 17
The overriding message we received from the wholesale brokerage community was one of technological advance and expanding geographies
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