Base metals house of the year, Asia: BNP Paribas

Energy Risk Awards Asia 2020: Bank's metals business grows with expansion into new China products and purchase of SocGen portfolio

BNP Paribas began this year with a clear show of its commitment to the metals trading business. In January it acquired a portfolio of over-the-counter metals transactions from rival French bank Societe Generale, which exited commodities trading last year. That deal – which took more than six months of negotiations and due diligence – saw BNPP take on a large client portfolio globally, helping to build market share and reinforce an already strong presence in the Asia-Pacific region.

“We saw an opportunity to increase our market share and our client footprint – and it reinforces our commitment to the metals business,” says Mikko Rusi, Singapore-based head of FX, local markets and commodity derivatives, Apac at BNP Paribas.

It was a complex transaction to execute, says Audrey Safra, BNPP’s Singapore-based head of commodity derivatives Apac, given its combination of portfolios containing trades from the vanilla to the exotic, with hundreds of clients, and posing substantial credit and legal risks. The challenge, she says, was pricing the portfolio efficiently and competitively, and then having the appetite for the credit risk – and, of course, the customers had to be in agreement with the change. “At the end of the day, clients can’t be transferred from one bank to another unless they are amenable to it,” Safra says.

Within weeks, the global economy and the world’s commodities markets were to be roiled by Covid-19. However, Rusi says, BNP Paribas’ commitment to the region and to its clients saw the bank step in to help producers and consumers grapple with the effects of the pandemic.

“We were able to be there at a time of extreme volatility,” he says.

Nishan Hegde

Indeed, Rusi argues that BNPP’s longstanding focus on China has paid particular dividends this year. The bank is one of the few in the market that combines an international presence with an onshore licence, enabling it to trade both London Metal Exchange (LME) and Shanghai Futures Exchange (SHFE) derivatives and physical contracts, meaning the bank can provide liquidity in both onshore and international markets. After the Covid virus struck, “the pricing of iron ore onshore was quicker to recover than the SGX contracts, for example”, he adds.

The bank has introduced seven new metals products in China, including offering the Dalian Futures Exchange iron ore contract, and products where BNPP offers contracts to offshore customers that reference the metals price traded onshore in China. This complements earlier offerings that gave onshore customers access to products that referenced international prices.

“This allows our international clients to access the onshore markets without having to invest in an entity onshore,” says Nishan Hegde, Asia-Pacific commodity sales for BNP Paribas Global Markets. The products also allow the customer to manage the renminbi exposure inherent in trading Chinese onshore contracts. “BNPP is able to take care of the commodity exposure and manage the currency risk as well,” he adds.

In addition, the product suite also allows overseas traders to express a view on micro-economic trends within China – by, for example, using the SHFE hot rolled coil contract to take advantage of increased investment in railway infrastructure in China, Hegde added: “Access to that exposure is something you wouldn’t get anywhere else in the international market.”

Throughout the market turmoil that has followed the Covid pandemic, BNPP’s commodities team has been able to step in and assist clients to take advantage of and manage volatility across all asset classes. Safra gives the example of helping a client monetise a position in LME aluminium contracts that was deep in the money following the drop in prices in the first quarter of 2020. However, the client was unable to realise cash from its position, because the LME only settles any amount payable on futures positions at contract expiry.

BNPP essentially took the on-exchange position OTC. “They were able to go from an open futures position, from which they couldn’t get any liquidity benefit, to getting the cash in their account on the same day,” says Safra.

“It’s been a tremendously challenging year,” says Rusi, “but it’s also been a remarkable one for the business. There has been a flight to quality, and I think we’ve been a beneficiary of that.”