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Derivatives house of the year: Macquarie Bank –

Being active in physical commodities trading gave Macquarie Bank a huge advantage in terms of market intelligence during the tumultuous months of 2020. It meant that it was able to effectively assess and manage its own risk exposures, get comfortable with new levels of credit risk, and offer much-needed credit lines to clients in a very timely manner, says Dave Duggal, head of North American oil origination.

“When the pandemic first hit commodity markets, we looked at our exposures and did a lot of analysis on the markets to help our credit team get comfortable,” he says. “This enabled our credit lines to open up again very quickly.”

Underpinning this work was constant and effective communication, according to Benjamin Davis, head of Macquarie’s Europe, Middle East and Africa oil sales team. In addition to daily sales and trading video calls, the team also connected more than usual with clients to find out how their needs were changing in line with market volatility.

“We were talking to our clients as much as we could, and then sharing that information internally on those team calls,” he says. “By understanding the needs of one client, we were often able to help others develop solutions, as well.”

Weekly or even daily video calls with the middle- and back-office functions became important during this time, too, says Duggal: “Clients needed to react fast [to market events], and we needed approvals quickly, so we were well set up in terms of communicating with the middle- and back-office functions.”

Indeed, this approach was particularly useful during 2020. Airlines, for example, had to deal with the double whammy of the pandemic’s devastating impact on air travel and cratering jet fuel prices, from which they couldn’t benefit because they were grounded. Macquarie had more than 30 airlines on its books, and had positions on with more than 20 of those organisations at the time.

“Macquarie’s risk appetite is sophisticated, but conservative,” says Davis. “But no credit model could have predicted [the sharp drop in] jet fuel prices last year. Many of our airline clients were hedged, but not consuming fuel, so they wanted to restructure.”

Macquarie was able to restructure hedges for many of these airlines, developing individual solutions for each. This meant working closely with both Macquarie’s own credit teams and the airline treasury teams to understand individual liquidity positions, as well as each client’s ability to raise finance and manage collateral over various time periods.

“We then agreed to cancel or roll positions,” says Davis. “But … figuring out elements such as exactly where to roll the position, how to adjust the volume, the shape of the curve and credit costs can be complicated. We worked out the best way to do this, and it certainly wasn’t a one-size-fits-all approach.”

The US-based team used a similar approach with its oil- and gas-producer clients over the past year, according to Duggal. For example, Macquarie’s North America sales team helped a US-based oil producer fix the floating price components in its oil sales agreements at the height of the pandemic volatility that affected the global oil markets last spring.

This involved hedging more than 30,000 barrels per day of Calendar Month Average rolls, Midland/Cushing and WTI/Dated Brent spreads on behalf of the client. As a result, the producer was able to gain some price stability during this volatile period in the market. Duggal adds that the team is well placed to develop and execute these kinds of solutions for corporate hedgers because of Macquarie’s physical capabilities across commodity markets including oil.

Macquarie hopes to continue along the same lines as interest builds in global environmental commodity markets. Because of its physical footprint in blending and trading gasoline and diesel, the bank has its own Renewable Identification Number (RIN) obligation under the US Renewable Fuel Standard (RFS) programme, a federal initiative to reduce emissions and expand renewable fuel production.

“We have a dedicated RINs trader, managing our own risk and obligations under the RFS, along with credit officers that understand the drivers of its volatility to provide appropriate risk limits. Our platform can leverage this to provide solutions to clients to mitigate price risk,” says Duggal. “A forward derivative, a swap for that market, is a great way to create value for our clients on a very volatile commodity.”

For Macquarie, maintaining an in-depth understanding of these markets enables it to offer credit and develop innovative solutions when others might not or cannot. And by focusing on both internal and external communication during the unprecedented events of 2020, Macquarie was able to share this expertise to support its clients.