Commodity Derivatives House: Bank of America

IFR Awards 2022
4 min read
Christopher Whittall

Balanced books
Commodity markets went on a wild ride in 2022 following Russia’s invasion of Ukraine and a spike in global energy prices. For diversifying its business into Europe and Asia while helping clients navigate these volatile markets and the energy transition, Bank of America is IFR’s Commodity Derivatives House of the Year.

Commodity Derivatives House

Much of the previous decade saw investment banks scale back in commodities as tougher regulation and a decline in industry-wide revenues called into question the profitability of this business. For the handful of firms left standing, 2022 proved to be one of the most lucrative trading environments on record as Russia’s invasion of Ukraine convulsed natural resource prices and residual supply-chain bottlenecks stemming from the coronavirus pandemic clogged up global trade.

Investors, producers and corporate treasurers were forced to reassess their exposure to commodities, spurring a flurry of hedging activity. A jump in margin calls on pre-existing hedges, meanwhile, caused many firms to cast around for ways to raise additional funds.

The subsequent upswing in client activity vindicated Bank of America’s decision a few years earlier to start revamping and investing in targeted pockets of its commodities business. Those investments bore fruit as the bank helped clients navigate 2022’s treacherous environment, allowing it to capitalise on the increased demand for commodity derivatives and financing while also diversifying its footprint across different geographies, client types and products.

“What we’ve done over the past few years is continue to identify growth opportunities for the bank and our clients,” said George Cultraro, head of global commodities trading. “Whether it’s by product or by geography, we map out where our clients need us the most. Our plan was never to be everything to everyone, but to be able to face our clients in a way that delivers them the risk solutions and products that benefit them and also give us the ability to grow as we see markets transitioning.”

BofA succeeded in growing client revenues by over 90% from 2020 to 2022, while diversifying its business through significant expansion in both Europe and Asia-Pacific. As a result, it has gone from generating almost 80% of its client revenues in the Americas in 2019 to about 55% in 2022.

The growth in Europe came amid a historic squeeze in energy prices as governments scrambled to replace Russian gas with other sources of supply before winter. BofA said it provided “significant liquidity” to corporate clients in the region to help them navigate the “extreme volatility” during this time as many faced large margin calls on derivatives hedges. The beefing up of BofA’s onshore presence in its Paris office helped in that regard, with the bank having materially increased commodity staffing levels on the continent in recent years.

That came amid a broader growth of its commodities franchise that has seen headcount increase by about 20%. Among other things, BofA bolstered its coverage of hedge funds ahead of an expected rise in volatility following the end of the pandemic. In terms of asset classes, meanwhile, BofA prioritised metals trading and global gas as areas of investment.

“We’ve been very thoughtful about slowly building out different businesses” and in different geographies, said Tom Blair, global head of commodity sales and co-head of global markets investable indices sales.

“You never know where the event is going to be in commodities,” Blair said. “That’s why it’s so critical to have a broad platform.”

BofA’s decision to invest in natural gas and metals traces its roots to another of the bank’s strategic priorities in commodities: the energy transition. BofA sees gas playing a vital role in that process as economies wean themselves off coal and it is investing to expand outside its traditional stronghold of the Americas. Similarly, BofA believes metals will be important in the deployment of clean energy technologies and it is growing its global team with a focus on sustainability.

In terms of personnel, BofA recently hired market veteran Brett Orlando as head of commodity transition. It has also more than doubled its environmental products revenue in 2022 across both mandatory and voluntary carbon markets. Elsewhere, the bank has significantly expanded its sustainable finance commitments with a particular focus on solar and wind tax equity deals. “Environmental solutions is … a big area for us today, but it will only get bigger over time,” said Blair.

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