Ronan Julien, global head of commodity derivatives e-distribution at BNP Paribas, talks about how the bank is doing things differently in the commodities space.
Profit & Loss: What do you think is differen about your approach to listing commodities on your e-trading platform?
Ronan Julien: The way that commodities trade is largely the same as it was 10 years ago. However, the demands from clients on the one side and regulators on the other have continued to evolve and so we looked to other asset classes for inspiration to help solve this disconnect.
In terms of what we do differently, the first thing to note is that we mostly offer OTC commodity products on our platform, in contrast to other platforms which focus on the listed markets.
The second thing to note is that most banks in this space built an FX platform and then wanted to make it cross-asset so they added one or two vanilla commodities products to it. By contrast we have around 70 OTC commodities products available via our platform.
P&L: How does offering OTC rather than listed products help your clients?
RJ: The commodities trading world is largely driven by corporates who need to trade a very specific amount of certain commodities in a certain currency in order to make sure that they have no basis risk. Vanilla products are not an exact hedge for these firms’ exposures so they’re still going to do their hedging via the voice desks. By contrast, offering OTC contracts enables them to execute the exact hedge that they need, and we also offer the ability to see prices during functioning hours for these products, which solves a number of issues for our clients.
P&L: Such as?
RJ: Number one, it helps clients on the pre-trade side. If a client wants to test a trade idea, see prices, be certain that the Know- Your-Customer (KYC) requirements are being met, check that they have enough credit to trade and do a specific structure for a product, the platform can do all this instantly. So it’s reducing the pre-trade complexity for clients.
The second way it helps is when it comes to execution. FX is a very fast moving market, if there’s an opportunity you can execute instantly. By contrast, in commodities you usually have to call up salespeople, ask prices, and this can take a few minutes. On our platform if the price is ticking on screen the moment I decide to trade I can just unlock and click, meaning that the risk associated with execution disappears.
And then there is all the post-trade, which is really streamlined. If I ask a client today how long it takes to get the confirmation email saying that they’ve done a trade, depending on the structure of the trade, it can range from a few minutes to an hour or two. On our platform, as soon as you click you get confirmation of the trade in the blotter, via email and then a formal confirmation sent to the back office within 10 seconds. This kind of streamlined post- trade functionality might seem obvious for FX, but it’s not for commodities.
P&L: How much value is there in electronically pricing illiquid OTC products though? There’s a reason why these products don’t trade much electronically, if the pricing isn’t good won’t traders just end up calling up the voice desk instead?
RJ: You have to think about the liquidity of the product but also the tenor and specific volume required, and in some cases these requirements mean we can’t keep everything live streaming. We still have a set of trader interventions so when the clients click to get a live price there are times when the trader will notify them that it’s not liquid enough and they will have to request a price.
Out of the 70 commodities products we offer our platform there are probably about 15 that are really illiquid and have lots of limitations on trading. For the rest, when I talk about these products being “illiquid” I mean that you have no transparency rather than to say the product doesn’t trade. Unless I’m a really sophisticated client with a full trading floor and relationships with lots of brokers, the price that I want is out in the market and I just don’t know what it is. By contrast, the bank always knows where the price is, so what we’re doing for a number of these products is showing our clients where it is all the time.
P&L: Do you see FX as a roadmap for how the commodities space will develop?
RJ: Looking at FX to decide the roadmap for commodities has a lot of limits. We’re actually looking at a model that is somewhere in between equities, where there are a lot more structured transactions and the platforms are a lot more complex to use, and FX, which is much more streamlined and vanilla.
That being said, we are developing our e-trading platform so that no matter what the underlying asset being traded is, the front-end appears the same for everything, with the ability to move seamlessly between each.