Derivatives house of the year: BNP Paribas

Energy Risk Awards 2019: Physical and financial capabilities and presence across full spectrum of commodity markets sets derivatives team apart

Guillaume Picot, BNP Paribas

Whether it was providing working capital finance for US refiners, marketing Australasian gas into Europe, enabling gold to move from Eastern Europe into Canada, or expanding its onshore China business, the diverse range of activities carried out by BNP Paribas over the past 18 months demonstrated the breadth and depth of its commodities franchise.

“Commodities is a global business, and without that global presence you can’t serve commodity players with activities all over the world,” says Guillaume Picot, global head of commodity derivatives sales for BNP Paribas. “Likewise, you can’t be a serious commodities derivatives player unless you can trade physical.” 

With a client base that covers the entire commodity life-cycle from producers and consumers to refiners and utilities, traders, investors and sovereigns, BNP Paribas is one of only a few banks providing markets across a whole spectrum of different activities, from French power to options on the Japan-Korea Marker, from European Union emissions allowances to freight, coffee and platinum group metals.

Its commodities coverage also spans the full spectrum of banking services from merger and acquisition advisory to financing, from risk management to investment.

Of its many deals completed in the past 18 months, one of the most noteworthy was a contingent oil and gas hedge that closed in February 2018 and enabled a French utility to sell a portfolio of oil and gas assets in the North Sea, North Africa and Indonesia to an independent oil and gas firm. While contingent hedges are not new, this structure was innovative as it needed to address a number of complexities. Firstly, the seller had hedges in place (which included a huge heterogeneous portfolio of commodities covering oil and gas) and didn’t want to novate them ahead of the deal in case the deal didn’t go through.

Meanwhile, the buyer wanted the positions to be novated in the event of the deal so they wouldn’t have to set up a complete hedging programme on day one. Additionally, the seller wanted to avoid taking any credit risk on the buyer.

BNP Paribas was able to come up with a deal that allowed the seller to unwind its hedges only if the acquisition was completed, and for the buyer to hedge in the same circumstances. It also allowed the seller to take credit risk against the bank rather than the buyer, while granting the seller fixed capital charges on the novation, rather than exposing them to the variable mark-to-market of the positions. 

Because the firm also financed the acquisition, it held pledges on the underlying assets, which enabled it to take on the credit risk. Additionally, BNP Paribas is one of the very few banks able to trade in the wide range of markets required to novate the hedges, says Daniel Cohen, who works in commodities sales and origination. A critical aspect was its extensive activity in the liquefied natural gas (LNG) market. While the majority of the assets were North Sea oil-producing ones, the portfolio also included LNG production facilities in North Africa and Indonesia.

“BNP offered the client the ability to trade a wide variety of underlyings and, in particular, we were able to accommodate one extremely complex formula within the portfolio of trades being novated,” says Cohen.

The fact that the bank was on both sides of the derivatives trades also enabled it to offer very keen pricing, Cohen adds. 

Commodities is a global business, and without that global presence you can’t serve commodity players with activities all over the world

Guillaume Picot, BNP Paribas

As well as innovative deals that push into new markets, BNP Paribas is also keen to pioneer the technological advancement of commodities trading. In 2018, it won Energy Risk’s innovation of the year for its Cortex CD electronic trading platform and since then it has continued to develop this offering. It now allows clients direct access to the platform, rather than logging the deal with a trader to input. Client growth on the platform was strong across the board last year, but particularly in base metals, which registered a 700% increase in activity.

According to Picot, one major reason for Cortex’s success was that it was built specifically with commodities in mind, rather than being an addition to an existing foreign exchange or equity trading platform.

“Instead of just adding a few futures onto an existing platform, we designed Cortex CD to serve commodity players’ specific requirements,” says Picot. “As a result it took us longer to set up our platform than some of our competitors, but we now have an offering that serves the entire commodity spectrum.”

One strategic decision the bank took was to discontinue its trading operations in the US and focus its commodity derivatives trading activities in London and Singapore in 2019. Picot says this is part of a continuous effort to better manage resources, in particular the building of its physical precious metals business centred in Asia and Europe. US clients will continue to be served by the bank’s round-the-clock sales teams in Europe and Asia.

Picot says the reorganisation will help ensure the bank’s continuing presence in the commodities sector. “We remain one of the few banks globally with a long-term vision for the growth of the commodities franchise,” he says.