Most banks trading in the commodities and energy markets in Asia have scaled down their businesses in the past six months, ahead of tighter regulations in the United States and amid heavy losses stemming from the eurozone crisis.
The poorer trading environment has already sparked off an exodus of talent, even from top banks including Goldman Sachs and Barclays, to physical oil trading companies. The flow is expected to continue as new rules swing the balance of power in the oil markets back to physical traders, particularly over price setting, which will become more reflective of supply and demand.
The flow out of investment banks into trading firms is a reversal of the moves in personnel that characterised the entry of big funds into energy and commodities markets over much of the past decade. That move saw investment banks build up their operations to meet the rising demand for exposure to commodities markets from investors keen to diversify.
"Between the imminent reality of the Dodd-Frank Act and the poor economic climate, banks aren't exactly the place that ambitious traders want to be any more," said a Singapore-based oil derivatives trader with a US bank. The Dodd-Frank Act, legislated last year in the wake of the 2008 financial crisis, calls for regulation of banks' trading activities as it seeks to prevent a recurrence of billion-dollar bailouts with US taxpayer money.
The tougher regulatory environment has also come from the Group of 20 (G20) countries, which has committed to have all over-the-counter (OTC) derivatives in their jurisdictions to be cleared through central counterparties by end-2012, to give regulators more oversight of trading activity.
The US regulations could extend to overseas subsidiaries of US banks and even to non-US based counterparties, as long as trading volumes are deemed to be significant in size, industry sources said. The regulations limit the size of the speculative positions that bank traders can take, minimising potential losses on the one hand but also limiting the potential for profits and bonuses.
All this is happening in an environment which has seen finance for trade tighten and become more expensive as banks struggle to mitigate their exposure to the eurozone crisis. At least 10 bank traders have left their jobs in Asia in the past 12 months or so, with more than half joining physical oil trading companies, while only three new entrants have been seen joining banks during the same period, the sources said.
Barclays Bank, which used to be a major player in the distillates market, has seen its monthly average swaps trade volumes plunge by about 45 percent since losing five of its six oil traders in the past six months or so. A Barclays spokesman declined comment.
Others that have downsized include Credit Suisse, which has shrunk its Asia team from more than 20 personnel in 2009. Credit Suisse said they don't comment on staff movements. Bank of America Merill Lynch (BofA) has also cut about 20 staff and Japan's Nomura Bank has shut most of its commodities and energy trading desks.
Citigroup and Standard Chartered have been the exceptions, maintaining and even expanding both staff numbers and trade volumes in the past year or so. Citigroup didn't respond to emails seeking comment. Most of the banks that trade in Asia's oil markets typically combine speculative volumes with hedging flows from customers such as refiners, airlines and shippers.
Their profits are mostly derived from proprietary trades, where traders are allowed to take sizeable positions, limited only by the amount of capital that the banks allow them to put at risk, or Value-At-Risk (VAR). Exceeding profit targets leads to lucrative bonuses, encouraging more aggressive, and perhaps risky, trading. "If we can't do prop trading, we might as well pack up shop and go because there aren't enough customer flows to go around here in Asia and we have all been thriving mostly on our own speculative volumes," another bank trader said.
Over the past 12 months, most banks have cut their traders' VAR, reducing their capacity to trade, in anticipation of the position limits to be implemented by the Dodd-Frank Act as well as to cope with burgeoning losses that result mostly from the eurozone crisis.
At least one major US bank, said a trader who had left it recently, has cut its VAR by more than 50 percent. Just 2 to 3 years ago, some banks returned to the Asian market or expanded their businesses, on a belief that the region's growth, particularly in China and India, will be sufficient to sustain their businesses after the global financial crisis.
No bank has been a major pricing presence in any of the oil product markets from the second-half of 2011, traders said. UK-based Barclays, a major player in Asia's distillates market, traded 3.8 million barrels between July and October, or a monthly average of 950,000 barrels, from about 10.35 million barrels from January to June, or an average of 1.73 million barrels per month, Reuters data showed. Overall average monthly volumes for the first half of the year were slightly higher at 5.6 million barrels, versus 5.4 million barrels for the second half, until October.
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