Barclays Capital is the first bank to offer to intermediate over-the-counter (OTC) commodity trades that will save hedge funds money and reduce paperwork, the investment bank told Reuters. Mark Croxon, a director at the bank said the service comparable to that offered by clearinghouses such as LCH Clearnet is unique and that other banks looking at offering a similar service had withdrawn.
"If a hedge fund transacts deals with several parties which all go through Barclays, the advantage is you have one point of contact for operational purposes, in terms of reporting, in terms of settlement," Croxon said. "There is an advantage to be had in terms of margin. You could transact with 5 or 6 people who will all be charging you margin.
By consolidating everything with a prime broker you automatically get the benefit of offsetting positions." That reduces the amount of capital tied up in margins, he said. "Also it's time consuming and expensive to negotiate all those agreements to trade OTC."
The service for hedge funds is offered within the prime brokerage division of London-based Barclays Capital. Prime brokers typically offer hedge funds settlement, custody and securities lending services and earn their money by charging a premium over money market lending rates for loans.
BARRIERS TO ENTRY: Why have other banks retreated from developing a similar service? The problem Croxon said is heavy start-up costs. The cost advantage comes from Barclays having a centralised prime brokerage business, where commodities, equities and bonds are all part of a cross-product offering.
In many other banks equities prime brokerage is run as a separate business from fixed income and commodities.
"Our barrier to entry is very much lower and the ongoing maintenance of that system is very much cheaper. It costs us nothing to stay in the market," Croxon said.
Croxon said there was strong demand for OTC commodity derivative trades. "The trade could be an opportunity to arbitrage the very liquid in terms of what an exchange is showing and what price it can be traded at on the OTC market," he said.
"We've had discussions recently with hedge funds about steel, which is a nascent commodity. It could be a strategy of buying/selling the futures against the physical commodity." The London Metal Exchange launched its steel billet contracts earlier this year.