Despite huge pressure on markets to automate, the move to electronic trading in over-the-counter commodities remains glacial, encumbered by a lack of transparency that allows phone-based trading to persist.
In an effort to address this, BNP Paribas developed a single-dealer platform for corporate hedgers that sets out to overcome the trading barriers created by illiquid and opaque markets. The Cortex Commodity Derivatives (Cortex CD) platform, first rolled out to clients in December 2017, allows hedgers to trade commodity derivatives directly with the bank on screen. Like the small number of other single-dealer platforms in the commodities space, it offers liquid contracts such as Ice Brent and CME West Texas Intermediate. But unlike others, it also offers tradeable prices on many illiquid products that aren’t transparent anywhere else.
“We are offering a new level of transparency on pricing for illiquid assets and this is the real strength of the product,” says Ronan Julien, the global head of commodity derivatives e-distribution at BNP Paribas. “Today, there is no way for the majority of corporates – with the exception of the most sophisticated – to know where certain contracts are trading. Cortex CD offers that transparency.”
The platform provides a constant stream of live, tradeable prices on 48 oil underlyings – many of them Platts and Argus illiquid refined products – six base metals and 15 agricultural products. “Even for complex OTC contracts that are not on any screen, we maintain live pricing and the client can trade straight away,” Julien says. The ability to provide constantly updated prices is the “technological prowess” of the platform, he says, achieved through a combination of streaming live BNPP trading data and the use of automated algorithms.
“Corporates that are hedging physical positions need a much more granular contract offering than financials that tend to be more focused on liquid benchmark products,” he says. “For example, a bus company in the UK might want to hedge using Platts UK diesel rather than Brent, and it might want to trade in pounds rather than dollars.”
The platform offers trading in 10 currencies and allows users to change currency, volume, units and conversion factors. “Users can do all the things they would with a salesperson,” says Julien.
We are offering a new level of transparency on pricing for illiquid assets and this is the real strength of the product
Ronan Julien, BNP Paribas
Another major advantage of the platform is the operational efficiency it offers by automating and streamlining trade processes, Julien adds. Clients can build their trade structure on the platform before trading, carrying out credit checks and other trade approval processes on indicative prices without contacting the bank. “Pre-trade processes are very heavy, and this makes a huge difference,” he says.
Constantly refreshed prices then mean trade execution can be instant without fear of the market moving in the time it takes to place a trade over the phone. The platform also automates post-trade processes, sending trade confirmations and notification of the trade to blotters. The average time from trade execution to receiving a trade confirmation email is less than 10 seconds, according to the bank, compared with several hours of manual processing after an order is placed by phone.
Cortex CD also allows clients to monitor many products and prices simultaneously and to mark and share them with internal teams. “Internal trading teams can see and interact in trades if they need to and their middle office can also view the trade, which makes reconciliation much easier,” Julien says.
By automating more than 20 pre- and post-trade checks, the platform also frees BNPP traders up from having to carry out the plethora of time-consuming manual checks required under US and European Union regulation. “Today’s regulatory pre-checks take hours. By automating them the salesperson is freed up to do more meaningful work around origination,” says Julien. “It’s just unrealistic to think that the current level of pre-trade checks and post-trade processes can be done without a higher level of automation.”
In addition, algorithms automate a lot of the bank’s risk management around the trades executed on the platform, automatically generating offsetting trades where necessary. However, some manual oversight is still necessary, due to the bespoke nature of a lot of the trades Julien, says.
While the platform extends the Cortex brand name used elsewhere in the bank, Cortex CD was built specifically for the commodities market. Developers took three years of the bank’s commodity flow trades and created a system that would accommodate them, says Julien. The platform is being rolled out across Europe, the Middle East and North America and will extend to Asia this year, he adds. The team is also looking at expanding the energy offering to power and gas.
As well as offering a service to the bank’s existing flow trade business clients, Julien believes the platform will allow the bank to better service clients from other areas of the bank, for example retail, that have some exposure to commodities. “The commodities team doesn’t currently have the bandwidth to service all these clients, but Cortex CD would give them access to this new transparency and allow them to trade independently,” he says.
The service offered by the Cortex CD platform, while cutting edge in the commodities space, has come to be expected in other asset classes, such as foreign exchange. This is why BNP Paribas fully expects electronic markets to become the norm in the commodities space in the long term. “We’ve seen the switch to electronic trading in other asset classes and we believe it’s only a matter of time before it happens in commodity markets,” Julien says. “We want to be at the front of that evolution.”