Risk & Energy Risk Commodity Rankings 2013 – energy

Muted volatility, sluggish trading activity and regulatory changes have conspired to create a tough environment for energy market participants over the past year. That has fuelled a lot of movement in this year’s Risk and Energy Risk Commodity Rankings, with some banks seeing their fortunes fall significantly. Jay Maroo reports

To view a PDF containing the rankings results in full, click here.

Many investment banks in the energy derivatives market are likely to look on the past year as something of an annus horribilis. Continuing sluggishness in the global economy and low volatility in energy markets generated lacklustre trading opportunities, while a wave of new regulation affecting banking, derivatives and energy markets is also making life difficult for market participants.

At the market close on January 17, prices for the front-month Brent crude oil futures contract traded on Ice Futures Europe stood at $110.10 per barrel (/bbl). Although average daily prices for Brent crude reached their highest ever level during 2012, this shows little change from the level on January 3, 2012, when the front-month contract settled at $112.13/bbl. Similarly, prices for the benchmark Henry Hub natural gas futures contract traded on Chicago-based CME Group’s Nymex exchange settled at $3.494 per million British thermal units (/MMBtu) at the market close on January 17, 2013 – not far off from the $2.993/MMBtu closing price for the front-month contract on January 3, 2012.

The placid nature of markets for many energy products has provided little grist for trading desks, say market participants. Banks are also struggling to deal with a wave of new regulation, as well as increasingly assertive regulators. Markets such as US power and gas were previously a lucrative source of trading opportunities, but worries about the impact of a ban on proprietary trading contained in the US Dodd-Frank Act have caused some firms to scale back their presence. The Federal Energy Regulatory Commission has also begun to bear its teeth much more readily than in previous years, homing in on a number of banks for alleged manipulation in US electricity.

Meanwhile, requirements to clear and margin trades contained in both Dodd-Frank and the European Market Infrastructure Regulation have fuelled uncertainty in the energy derivatives market on both sides of the Atlantic. In the European Union (EU), energy firms are working hard to get to grips with requirements embedded in the Regulation on Energy Market Integrity and Transparency – legislation that was adopted in December 2011 and seeks to stamp out insider trading. More significantly for banks, increased capital requirements contained in Basel III are expected to heavily penalise energy and commodity derivatives desks, leading many firms to fundamentally reassess their commitment to the area. Consequently, many banks have seen sizable layoffs, with some selling commodity and energy-related assets; others reducing their participation in the market; and others exiting commodities altogether.

Last year was the year of hesitation... As a result, we saw less volume from all corners of the marketplace

“Last year was the year of hesitation, arising from a combination of three elements – regulatory uncertainty within markets, lower primary market price volatility and new uncertainties around Basel III, which threatened to directly impact upon bank capital requirements for both commodity trade financing and for proprietary risk taking. As a result, we saw less volume from all corners of the marketplace,” notes Paul Newman, London-based managing director at Icap Energy.

Like other banks, Société Générale Corporate and Investment Banking (SG CIB) has felt some pain. In December 2011, it was revealed the French bank was taking the tough decision to shutter its North American physical power and natural gas business during early 2012. Jonathan Whitehead, the bank’s London-based global head of commodities, claims that making this choice helped the firm win top energy and commodity dealer overall in this year’s Risk and Energy Risk Commodity Rankings: “Our early exits from physical natural gas and power in the US have actually helped the business, as recently, these sectors have not been conducive to investment and have suffered from low price volatility,” he explains.

Another reason for the bank’s success is its decision to closely integrate its commodities business with its trade finance and research divisions, says Whitehead. The level of integration at the firm is a key differentiator for SG CIB, he claims. “It’s not about prop trading but about how well you can assess what your clients want. This integration has brought about much greater information flow, which has meant a better understanding of how best to serve our clients.”

Structured launch

One example of this is the formation of an internal taskforce in April 2012, meant to bring together the bank’s analysts and senior commodity derivatives bankers. Whitehead says the formation of the group led to the launch of a number of successful structured products referencing commodities during the past year.

Among energy dealers, SG CIB rose from fourth position overall last year to reach first place overall this year, garnering 11.4% of the vote. This is up 2.1 percentage points compared with 2012, when the bank received 9.3% of the vote. Although other banks are arguably better known for their prowess in energy derivatives, SG CIB’s strong overall showing is founded on a solid performance across a broad range of asset classes. Excluding metals, the bank took first place in 18 individual categories, winning the oil categories overall and emerging as the best dealer overall in Europe. It delivered particularly strong results in areas including European oil and products, European natural gas, research and structured products.

The bank’s gain comes partly at the expense of last year’s winner, Morgan Stanley, which saw its ranking plummet from first place to just fifth among energy dealers overall. Sources close to the bank blame the poor performance on speculation about the possible sale of its commodities unit to the Qatar Investment Authority in October – a development that is unlikely to have helped its standing among energy derivatives clients. In the end, the firm received just 7.1% of the vote, down from 12.1% of the vote in 2012.

Another bank that faced a disappointing performance this year was Barclays. The London-based investment bank dropped by five places from last year among energy dealers overall, finishing in tenth place. Its share of the vote dropped by almost half, from 8.5% in 2012 to a meagre 4.6% this year. The result appears to reflect a state of internal flux in the bank’s commodities unit, which has seen a number of high-profile departures over the past year, most notably its former London-based head Roger Jones.

Mike Bagguley, who replaced Jones after his departure in May and also serves as head of foreign exchange, admits the emphasis for many banks is now on making the commodity business leaner and more efficient. “Historically, banks had been fairly inefficient in their commodities businesses – [but] banks like us have moved quickly at emphasising efficiency,” he says. Although the bank is in the midst of restructuring its business, he believes it will be well positioned to make a comeback next year. “In terms of preparing for the new world order, we are where we want to be broadly across energy and metals – a strong global business, good capability in the physical markets and well focused on areas such as working capital for commodity firms. I am particularly optimistic on the energy side of our business.”

Number two

At number two among energy dealers overall is Goldman Sachs, which retains its second-place ranking from last year. The US investment bank saw its share of the vote fall slightly from 10.7% to 10.3%. However, it retains its position as top overall dealer for natural gas and was also ranked as best dealer overall in the Americas. Although markets have been difficult recently, Peter O’Hagan, New York-based global head of commodity sales at the bank, says it has learned to cope with occasional market fluctuations – and he is upbeat about improving the bank’s performance next time around. “Thanks to the huge upsurge in oil and gas production and well-organised markets, there are terrific opportunities in North America and we expect those opportunities to continue for the next couple of years,” he says.

Like Goldman Sachs, Deutsche Bank also held onto its position from last year’s rankings, maintaining a 9.5% share of the vote to finish third among energy dealers overall. The German bank only managed to achieve first place in one individual product category, but was consistently ranked in the top five elsewhere. Despite its strong showing, the bank was engulfed in negative headlines towards the end of 2012, with revelations that two of its senior executives were under investigation in Germany for discrepancies in the bank’s 2009 value-added tax statement relating to carbon credits. It is also said to be following other banks in scaling back its presence in US power and gas.

Although Deutsche Bank would not comment directly on the matter, Louise Kitchen, London-based global head of commodity sales and structuring, acknowledges it is attempting to become more efficient in commodities. “We spent the past five years building the commodities business. In previous years we were building out our platform, but now that we have the main product offerings built, we are driving efficiency gains uniformly through the system to ensure our platform remains efficient,” she says.

This year, Credit Suisse and JP Morgan switched places among energy dealers overall, with the Swiss bank rising from seventh to sixth place. However, the firm achieved this on a reduced share of the vote, going from 6.9% to 6.8%.

While the fortunes of many banks in the market are diminishing, other types of firm have done remarkably well this year, with this year’s Risk and Energy Risk Commodity Rankings containing frequent mentions of utilities, independent traders and integrated energy firms. The best non-bank performance came from Paris-based GDF Suez Trading, which was unranked last year and managed to score fourth among energy dealers overall. The firm achieved 8.2% of the vote thanks to strong showings in European power, gas and research. Edouard Neviaski, Paris-based chief executive of GDF Suez Trading, claims total energy derivatives volumes at the firm are up 30% on last year – a phenomenon that is largely down to a poor performance from banks. “Our results have been progressing nicely – we have had increases across all energy products. Because of the banks leaving or being less active, we are getting some more market share,” he says.

Neviaski believes creditworthiness has been crucial to the firm’s success. With the credit ratings of banks having suffered over the past year, GDF Suez’s solid credit profile has put it in a good position. As of mid-January, GDF Suez was rated A and A1 by New York-based Standard & Poor’s and Moody’s Investors Service, respectively. “Today, the credit ratings of banks are not what they used to be and GDF Suez Trading benefits from this,” he claims. Neviaski believes the trend is set to continue over the coming years, with non-bank firms such as GDF Suez Trading continuing to grab market share.

Non-bank

Another non-bank firm to have done well in this year’s rankings is the trading arm of Paris-based EDF. Although EDF Trading’s overall energy ranking remains the same as last year, the firm managed to scoop first place in power overall, dislodging Citi and becoming the first non-bank to top the category.

In spite of the dramatic shake-out among dealers, this year’s line-up of energy brokers remains similar to 2012. With a sizeable 17.1% of the vote, Icap Energy retains its position as top broker in energy. Excluding metals, the firm came first in 19 individual categories, coming in first place among brokers in oil and natural gas overall. “The most important thing for us is the consistency and patience with which we do business,” remarks Icap Energy’s Newman.

He says he is particularly proud of Icap Energy’s performance in European natural gas – and there, the broker achieved a clean sweep, taking first place for all seven trading hubs. Although the European natural gas business was originally a lossmaker for the firm, Newman believes the results vindicate its decision to remain active in the market. “Despite it not being an obvious place to invest during the first couple of years when we entered the market, we stayed with it. It has worked out to be extremely successful,” he says.

 

How the poll was conducted Risk and Energy Risk received 1,233 valid responses to this year’s survey. The responses were divided between Europe (59%), North America (22%), Asia (15%) and other (4%). Participants were asked to vote for their top three dealers and brokers in order of preference for any categories in which they had been active over the course of the year. This year some categories were amalgamated or cut after consultation with market participants. We felt this better represented the way most desks are set up and also helped streamline the survey, which has become longer each year due to expanding markets. The organisation of the rankings will be revisited again next year and any feedback is welcome. It is important to note this poll is not designed to reflect volumes traded in any particular market and is therefore not necessarily a direct reflection of market share – voters could base their decisions on a variety of criteria, including pricing, liquidity provision, counterparty risk, speed of execution and reliability. In that sense, this poll should be considered a reflection of how market professionals view their peers in terms of overall quality of service. When aggregating the results, we strip out what we consider to be invalid votes. These include people voting for their own firm, multiple votes from the same person or IP address, votes from people using non-work email accounts, votes by people who choose the same firm indiscriminately throughout the poll, votes by people who clearly do not trade the product, and block votes from groups of people on the same desk at the same institution voting for the same firm. The votes were weighted, with three points for a first place, two points for second and one for third. Only categories with a sufficient number of votes are included in the final poll. The top firms are listed by overall percentage of votes. To decide the overall winner, we use the overall percentage of votes for each firm. The survey also includes a series of overall product leaderboards, calculated by aggregating the total number of votes across individual categories. These results are naturally weighted, as there are usually more votes in the larger, more liquid, categories than the smaller ones.