Precious metals house of the year, Asia: BNP Paribas

Energy Risk Asia Awards, 2017: Bank’s Chinese gold offering drives growth

Mikko Rusi, BNP Paribas

Over the past year, global volatility has been low in precious metals markets, but BNP Paribas has increased its diverse client base – which includes central banks, hedging producers and institutional investors – by around 40%.

“Trading [has been] relatively difficult,” says Mikko Rusi, head of commodity derivatives at BNP Paribas. “We have started to see some recovery based on a variety of factors – geo-political elements, for example. But, for the moment, it’s been an environment where interest rates are rising and volatility is very low. From a bank’s perspective, it’s been most important to have a business that is able to serve clients in these difficult and complex market environments.”

At the start of 2017, BNP Paribas China, a subsidiary of the group, began to offer gold hedging and trading capabilities for Chinese firms, allowing the bank to support precious metals services to corporate clients.

“The focus of development has been in China,” says Rusi. “In precious metals, we have tried to very strongly push our service offering onshore with a couple of different products.”

The bank hopes to capitalise on a growing demand for exposure to precious metals prices, mainly from those Chinese firms aiming to diversify their hedging programmes. More widely, it also plans to support mining companies in their ongoing risk management needs across Asia. The market is ripe, suggests Rusi.

“I think many clients will genuinely want to do some hedging in an environment where you have uncertainty about which direction the price will move in precious metals,” he says.

As an example, the firm got involved in a syndicate of three banks to help an Australian mining client in restructuring its existing hedge book. The restructure allowed the client to better align the delivery profile with expected production. In addition it fixed the delivery price of gold production for the majority of future production, creating debt capacity within the project.

There is clearly a role for us in longer-dated hedging and credit, but on the flipside we need institutional clients to provide liquidity and sit between those ‘technical’ participants

Mikko Rusi, BNP Paribas

It also prevented the firm from paying out on the unwinding of a number of out-of-the-money spot deferred contracts. Those contracts were an open-ended obligation with no maturity date set over a range of gold prices that were consolidated into forwards with fixed dates under the new arrangements. The new structure simplified the hedge and better matched it to the client’s needs.

Within the structured products landscape, BNP Paribas has developed an Autocallable Daily Range Accrual certificate, which is linked to a ‘worst-of’ basket of gold, silver and platinum products. It is intended to allow investors to benefit from any ‘bullish or slightly bearish’ price movements of the worst-performing precious metals. It’s a unique offering.

Each quarter, the investor receives an enhanced coupon based on the number of days during the elapsed quarter the basket closes above a specific barrier. If the basket closes above its initial level, the structure is automatically early redeemed and no coupon is paid. At maturity, the client is short a put on the basket, assuming the product has not been early redeemed.

The bank sees its longer-term growth stemming from the provision of services across the precious metals supply chain. Market-making will be key to that growth, and BNP Paribas Commodities Trading Shanghai has that capacity in being able to trade both on- and offshore physical and futures instruments in the commodity markets. The demand for market-making is not likely to decline, says Rusi.

“There is still a need for banks in their role as intermediaries between the various participants,” he notes. “There is clearly a role for us in longer-dated hedging and credit, but on the flipside we need institutional clients to provide liquidity and sit between those ‘technical’ participants.”

Demand for services will depend upon several factors, including volume and pricing, and the maturity of the user base. Central bank policies and geopolitical issues will be key to the market, says Rusi.

“Some people who are in precious metals are so focused on the stock market, which continues to grow higher with a strong synchronised growth,” he says. “We really need to see how the markets will react and whether we start to move higher from this very low volatility environment or not.”