Metals house of the year: SG CIB

Recent deals with Barclays and Jefferies Bache have highlighted the French bank’s commitment to metals

François Combes, SG CIB

Against a backdrop of increased regulatory scrutiny, lower revenues and higher capital charges, the withdrawal of many banks from commodities has had a withering impact on the base metals market. Firms such as Barclays and Deutsche Bank, once seen as formidable market-makers, have left the market, choosing to focus more narrowly on precious metals instead. That has created opportunities for banks that remain committed, including Societe Generale Corporate & Investment Banking (SG CIB).

After Barclays announced its intention to exit most of its commodities business in April 2014, the bank placed both its physical and financial metals books up for sale. For SG CIB, the sale of the books represented a golden opportunity: a chance to work with a range of new clients once served by a respected competitor, says François Combes, the French bank's deputy head of commodities markets and head of metals. "If we had to benchmark our [metals] business against the competition over the last 10 years, Barclays would always come up in the shortlist," Combes says.

SG CIB ultimately prevailed in its pursuit of Barclays' financial metals book. The book consisted of tens of thousands of client trades in a variety of base metals traded on the London Metal Exchange (LME) – namely, copper, aluminium, zinc, nickel, lead, tin and aluminium alloy. The transactions in the portfolio were mainly LME forwards and options, but some over-the-counter positions were also included.

Taking on the portfolio was a lengthy and complicated task. After Barclays circulated a two-page document looking for expressions of interest, SG CIB was selected to enter the auction process for the financial book in June last year, amid hot competition from other bidders. In the final days of the sale, the decision went down to the wire. Two bidders were left in the process when the LME closed at 6pm on January 14. Both firms had to run valuations of the portfolio based on the LME's closing prices and submit their final bids for consideration.

Once Barclays had evaluated the two offers, SG CIB was selected at 3am on January 15. That meant SG CIB had just a few hours to input all the listed transactions into its system before the LME opened at 9am that day. "From an IT point of view, it was easily the most complex [book purchase] I have ever seen," remarks Jonathan Whitehead, global head of commodities at SG CIB.

Hopefully it is pretty obvious to everyone in the market that we are committed

In part, SG CIB carried the deal due to its ability to swiftly onboard the LME clients and novate the remaining OTC trades from Barclays, says Whitehead. One factor that helped was SG CIB's existing relationships with some Barclays clients, which gave it greater comfort around counterparty risk. "Barclays had an interest in making this as easy as possible," says Whitehead. "What made the difference was: how many of their clients you could take on board and what you were going to charge to take on the positions, from a credit point of view."

It's not the only way in which SG CIB has capitalised on dealer withdrawals in the past 18 months. On April 9, for example, the bank announced it had agreed to acquire most of the futures broking activities of Jefferies Bache, including a significant chunk of client business in metals.

The purchase follows SG CIB's full acquisition in May 2014 of futures broker Newedge, formerly a 50:50 joint venture with Crédit Agricole. Merging Newedge's team into SG CIB has given the French bank the ability to compete more effectively in listed commodities, the bank says, and base metals are no exception. Whitehead says the addition of Newedge, which enjoyed a solid foothold with hedge funds and commodity trading advisers, complements its strength with corporate hedging clients.

Given the frequency with which banks have stepped back from commodities during the past few years, Whitehead says many clients expressed concerns that SG CIB might be next. But given the recent spate of deals, he hopes the bank's answer is now clear. "With the combination of the Newedge acquisition, the Jefferies and the Barclays deals, hopefully it is pretty obvious to everyone in the market that we are committed, despite the current difficulties in the marketplace," says Whitehead.