Q&A: Marc Fontaine, head of commodity derivatives, Americas at BNP Paribas

Marc Fontaine, head of commodity derivatives, Americas at BNP Paribas talks to Pauline McCallion about addressing energy end-user needs in light of the Dodd-Frank Act and recruiting new talent to the sector.

Marc Fontaine- BNP Paribas

Financial participants continue to grow their presence in physical energy markets partly in response to the regulatory regime change on the horizon under the Dodd-Frank Wall Street Reform and Consumer Protection Act, as well as renewed interest from hedge funds, private equity players and other investors.

BNP Paribas's acquisition of Fortis Energy Marketing & Trading in Houston and FB Energy Canada Corp in Calgary, completed in October 2010, has allowed the bank to boost its physical offering in line with client demand for market-making services, according to Marc Fontaine, head of commodity derivatives, Americas at BNP Paribas.

Having worked in the commodity sector since 1976, Fontaine has seen demand develop for the use of derivatives as a tool to manage the risks associated with commodity production, use and investment. During his time with the bank, the commodity derivatives business has become symbiotic with the bank's traditional activities such as oil and gas reserve base lending. The business now operates across the spectrum of the market from oil & gas to metals, power and carbon market-making activities.

Fontaine believes that providing a range of options to address the evolving credit and liquidity needs of the bank's clients is key to navigating the post-Dodd-Frank Act regulatory environment. In addition, he says such an approach will provide ample opportunity for innovation, luring highly quantitative and entrepreneurial minds to the sector.

Q. How does the acquisition of Fortis' physical power & gas businesses in Houston and Calgary, which closed last October, play to the trend towards a more client-centric focus for BNP Paribas?

A. Our decisions to provide liquidity in specific markets, regions or underlyings are driven by the needs of our clients. Our clients have long sought for us to also become a market liquidity provider in the physical arena, in part to focus on inventory finance, and facilitate monetisation of unencumbered oil & gas assets.

BNP Paribas is a substantial provider of capital and term finance to utilities, but they also require bundleds solutions with both finance and fuel off-take or hedging to meet their needs to expand plant capacity or to develop projects such as wind farms. Additionally, our platform can also now assist our clients by freeing up working capital as we offer long-term midstream asset transactions - for example, park and loans [temporary storage and/or loan of supply], transport and storage transactions. Lastly, the energy services part of the platform enables generation owners to access BNP Paribas Energy Trading's market capabilities.

We made a strategic decision to invest in the physical side of the market and sought to acquire a physical platform in North America in 2005. The acquisition of Fortis and its robust market-making platform for power and gas was very timely.

Q. What are the benefits of acquiring, rather than growing the business organically from scratch?

A. We looked to acquire a physical platform for a number of years but couldn't actually find a business with the right capacity, market presence or, frankly, the right price, since the cost of entry was rather high at that time. So, we initially took the decision to grow the physical side of our business organically, similar to the way we had developed all of our other products lines, from carbon to metals.

However, in going the organic route, it would have taken two to three years for us to become a credible physical market participant - just in terms of securing regulatory approvals, obtaining licences, issuing guarantees, or negotiating physical enabling agreements. The time to bring the complementary products to market would have been longer.

Q. So, post-financial crisis, what are likely to be the most important energy market trends and how will they affect the needs of the market?

A. There has been an increasing interest from equity sponsors and hedge funds in making stronger investments in physical infrastructure, such as owning or leasing storage or transportation. Such entities are looking for strong counterparties to provide gas to their storage or transportation facilities, for example. In a broader sense, these companies are looking to commodities perhaps because some of the more traditional investment instruments have been flat this year, while there has historically been more volatility in some commodity markets - and more upside as a result.

Q. What about important trends for energy producers?

A. Requirements to hedge natural gas liquids (NGLs) out to 36 months are increasing. There are numerous midstream clients that in recent years have had more requirements to lock in the price of NGLs. The ability to hedge NGLs at attractive levels going out several years now adds revenue to the bottom line and producers prize any such opportunity to lock in incremental value from production.

Q. Your first job in the industry was as a summer intern at Philipp Brothers, after which you joined the company's first trader trainee scheme - what are your thoughts on current recruitment programmes and career patterns in the commodities sector?

A. That's certainly an interesting question for me. I have some historical perspective, since I was fortunate to have gone through the trader training programme at Philipp Brothers, or Phibro as it is known today, in the early 1980s. About a year after completing the programme, I was asked by Phibro to participate in the recruitment process as a successful trainee, to share my experiences with new trainees. So I became involved in recruitment and development early in my career and have remained involved to this day, giving me a view of more than 25 years. I would certainly say recruitment programmes in the commodities sector have changed during that time.

Phibro was one of the first commodity houses to adopt a fully-fledged annual campus recruitment programme for trainee traders in the early 1980s. It emulated the programme of Salomon Brothers, the investment bank the company acquired in 1981. The firm's target schools specialised in engineering and the geosciences, for example the Colorado School of Mines, as well as strong east-coast schools such as Wharton and Columbia. The programme attracted trainees interested in physical commodity trading who had completed summer internships at metals mines or oil producers, as well as perhaps interning for the commodities finance arm of an international bank. This made for a very robust and diversified programme.

This was just before commodity derivatives really took off – before numerous investment and commercial banks developed either proprietary commodity trading or market-making arms to service the hedging needs of their clients. So it was certainly less competitive – we weren't bumping into other trading houses on campus looking for talent and I think that's a big distinction that can be made between now and then.

Today's recruiting programmes are very well calibrated and sophisticated, designed to discern if the prospective graduate can not only assess but create value, as well as whether or not they will be reactive or proactive within changing markets.

Q. Do you think upcoming derivatives regulation has impacted recruitment levels or interest from prospective graduate trainees?

A. Actually, there has been no real problem in finding or hiring new people. There was perhaps a slight drop-off in the number of potential candidates attending recruitment presentations at the height of the financial crisis. There was so much uncertainty at that time that some graduates might have shied away from the financial sector somewhat. But the reality, especially now, is that a career in commodities and market-making remains highly desired.

Highly quantitative and entrepreneurial minds will continue to be lured to the sector as equity sponsors increasingly deploy capital to energy producing, metals mining, storage and transportation assets. Globally, an increasing number of asset managers and institutional investors are investing in commodity-linked performance notes and looking for hedges against inflation and/or currency risk.

Also, replacing oil reserves in new or more-difficult to access geographies will require additional commodity specialists to help our clients manage the unique credit, legal and risk metrics they may encounter. The demand for all these requirements within a rapidly growing client base at BNP Paribas will only increase our need to find highly qualified and motivated graduates.

Something else that is not lost on candidates we have met in recent years is that asset managers, pension funds and insurance companies have capital to deploy and they know it's very challenging to earn decent return on those investment dollars. Commodities remain a very appealing asset class for such investors. Such investors also want to place those dollars with a financial institution that has a robust balance sheet and a very good rating.

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