Commodity Derivatives House: Societe Generale

IFR Review of the Year 2015
5 min read
mike kentz

Growth against the grain

As competitors retrenched further, one bank cemented its growth trajectory with a series of acquisitions to solidify a market-leading franchise in investment products and bespoke hedging solutions. For sustained commitment to expansion in the face of extreme market headwinds, Societe Generale is IFR’s Commodity Derivatives House of the Year.

Bank commodity businesses had a rough ride through 2015. Revenues in the asset class across the 10 biggest banks were around 20% down over the first three quarters. Many continued to scale back physical assets, while others responded with cuts to their futures businesses.

For those left in the game, 2015 was a year fraught with headwinds. Low energy prices took their toll on retail inflows, while some corporate clients struggled for survival. At the same time, regulatory costs associated with the business continued to rise.

Against that backdrop, many houses continued to reassess their commitment to parts of the asset class. But for Societe Generale, the turbulent landscape presented an opportunity to add to a business that had already been transformed by the integration of futures giant Newedge, in which the bank completed its acquisition of the remaining 50% in July 2014.

“We came into this year with everything in place,” said Jonathan Whitehead, global head of commodities at SG. “During 2014, we lived through a lot of change with the integration of Newedge and commodity markets generally. We’ve massively expanded the franchise and now is the time to capitalise on that.”

The bank kicked off the year with the purchase of Barclays’ base metals portfolio, winning the book after a six-month long selection process. SG executed the transfer of 30,000 listed and over-the-counter transactions overnight on January 14, including gap analysis of credit terms between itself and the UK bank and extensive client due diligence.

Just six months later, the French bank completed the acquisition of more than 200 Jefferies Bache clients, focused mainly on futures clearing and execution. It was an opportunistic addition, after earlier attempts to sell the business faltered.

“It came around at just the right time – if it had been six months earlier, I’m not sure we would have had the spare capacity,” said Whitehead.


The deals proved to be transformational, with revenues across the business set to double as the bank punctuates an effort to combine its expertise in bespoke hedging solutions with a push to provide margin finance expertise as well.

Reserve-based financing came under huge pressure in 2015 as a consequence of low prices and tighter lending requirements. But that didn’t stop the French bank from stepping in when clients needed.

In August, SG provided a large pre-acquisition hedge that facilitated the acquisition of Anadarko Petroleum’s coal bed methane assets by Moriah Group. The deal involved novation of a book of hedges from Anadarko to Moriah.

“Anadarko knew that the buyer wanted to hedge so the seller did that in advance. That’s unheard of,” said Whitehead. “We hedged first with Anadarko, which made it a more comfortable trade as some variables had been taken out of the equation.”

The trade was crucial for the deal to pass through smoothly and brought together the bank’s expertise in structured financing, hedging advisory and risk appetite to support clients.

“SG’s expertise in reserve-based finance was key to make the deal happen in a complex environment,” said Tyler Harris, CFO at Moriah. “SG was able to manage smoothly the execution of our pre-acquisition hedge, with limited impact on the market.”

The bank also locked in revenues for Peruvian metal producer Volcan through a prepayment arrangement that involved SG taking cash upfront in exchange for delivery of zinc and silver assets over a series of future settlement dates.

SG continued to outclass rivals in the provision of unique investment products, capitalising on its strength in equity derivatives.

“We’re always looking at ways to offer superior returns through smart beta,” said David Benhamou, head of the commodity investor business at the bank. “A lot of that stems from our cross-asset research and we are able to share a lot of ideas from the equity derivatives franchise.”

With the Dynamic Oil Hedging Index, SG offered oil investors a product that eliminates exposure to the negative roll yield associated with oil futures markets, by shifting futures exposures into oil-related equities when the curve is in contango.

“I think the main strength of SG is its capacity to create interesting index strategies,” said a senior portfolio manager at a major Asian sovereign wealth fund. ”We currently have a substantial portion of our commodities benchmark index invested with SG.”*

*The attribution of this paragraph was changed.

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Commodity Derivatives House: Societe Generale
Commodity Derivatives House: Societe Generale cartoon