Derivatives House of the Year: Deutsche Bank

While other commodities houses suffered against the backdrop of the European sovereign debt crisis and lower trading volumes in 2011, Deutsche Bank built on its product offering, expanded its business and attracted new clients. It now holds a 30% share of the global over-the-counter energy and commodities market, according to a survey of 268 global energy hedgers by consultancy Greenwich Associates.

Richard Jefferson, global head of commodities sales at Deutsche Bank, believes its dominant position in the European banking sector, a well-integrated research function and the sales team’s ability to read corporate clients’ needs gave the bank a better insight into trends in 2011, allowing it to take more calculated risks.

As a result, the bank completed standout deals in a range of areas over the course of the year, including structuring a $60 million volumetric production payment-style financing for a European oil and gas producer. It also provided 10-year power hedges for companies across Europe, assuming this risk in a market where liquidity shortages are often a concern beyond 2015. Jefferson is confident that the bank will be able to leverage its strong relationships with European industrials to sell the power at a later date. 

In the US, Deutsche Bank established a new relationship in 2011 with a US merchant generation firm that has filed for bankruptcy protection. By optimising the firm’s hedge portfolio, which spanned power options, gas options, swaps and spark spreads, Deutsche Bank says it provided the company with $250 million in liquidity relief.

The bank also developed its Chooser strategy in 2011 for producers and consumers of dollar-priced commodities in regions such as Asia, where currencies can move quickly against the dollar. The strategy links a commodity hedge to a foreign exchange rate so that the hedge is not exercised if the rate moves beyond a certain level – the loss of the hedge is then recouped through higher export earnings or lower import costs. It can be cheaper for the client than the use of plain vanilla hedges because Deutsche Bank can trade the foreign exchange component and use the proceeds to subsidise the commodity element of the transaction.

Deutsche Bank’s diverse client base has been key to its ability to develop such innovative risk management solutions in recent years, according to Jefferson. Current clients include corporates, major trading houses, asset managers, and governments and other sovereign hedgers. “Also, our reach as a bank with locations in many different countries provides diversity,” he continues. “We’re not looking in the same outlets for liquidity as everybody else.”

In 2011, Deutsche Bank boosted its business further with the integration of German private bank BHF-Bank’s listed derivatives business, which included an energy clearing platform. “BHF was very well connected to power and gas exchanges across central and eastern Europe, as well as parts of western Europe,” Jefferson explains. “An ability to offer clearing services across multiple exchanges at a time when clients are under increasing pressure to optimise overall margin requirements was pretty interesting to us.”

The acquisition also enhanced Deutsche Bank’s corporate client base and the bank was able to match these customers with existing clients, such as hedge funds, who often have opposing needs and views of the market to corporates. Deutsche Bank could therefore service both without having to take on significant risk itself, which allowed the bank to offer tighter pricing to clients.

“As we’ve grown revenues and been seen on the market that much more, it’s given us a greater prominence with clients,” Jefferson says. “Also, being seen as a client franchise business is incredibly important as the market moves towards a post-Volcker world. The diversity of clients we cover by sector and geography really sets us apart from pretty much all of our competition.”