So why on earth should I be rambling on about commodities on a FinTech web site? Well I believe that commodity market are a core asset class now for our leading banks and will become increasingly so over the coming years: Morgan Stanley recently put up
a list of its competitive strengths at a banking conference, commodities was at the top of the list; Goldman Sachs is a major player in physical commodity markets. Almost every bank operates a trade finance division financing the global trade in commodities.
Every day around $25 billion dollars of gold is cleared through six London banks, a record 3 million energy contracts were recently traded in a day on CME Group.
Commodities are an important part of today’s portfolio of products that banks have to be able to offer their clients. So many clients are exposed to commodity price risks as either buyers, sellers or both, that banks have to be able to offer them the commodity
risk management products alongside the FX and interest rate products. Many asset management organizations are now looking outside tradition equity and security markets to commodities as an alternative to give them safe-havens or anti-cyclic behavior.
So commodities are here to stay and an important part of the financial market place, but the scramble to cash in is not without its challenges. Commodities is not one asset class – it’s 20 or more. Each sub-sector having its own peculiarities and a language
alien to traditional financial markets – depending on where you trade gas you can trade in mmBTU, GJ, MWH or Therms (and there’s two of them!). The risks in these markets are different to traditional markets and banks have got their fingers burnt in the past.
The operational risks are significant – mess up closing out your futures and you might have a tanker-load of oil turning up so the processes and technology need to be right.
So I’ll be blogging on about some of the commodity issues and challenges for the FinTech community as they come up. I would love to hear from anyone else who shares the passion!