Derivatives house of the year: Bank of America

Over the past 18 months, Bank of America, winner of Energy Risk’s 2024 Derivatives house of the year, has significantly increased its commodity product suite, sharpened its focus on the energy transition and expanded its international footprint.

Between 2020 and 2023, the bank’s commodity client base increased by around 50%. Despite this growth, however, its strategy is to remain focused on the key demands of its clients, says George Cultraro, global head of commodities trading at BofA. “Our goal isn’t to be everything to everyone in the commodities space. It’s to grow a commodities franchise that aligns with our clients,” he says. “We asked ourselves: do we have the products that our clients are looking for, and where are the growth opportunities?”

For example, Russia’s invasion of Ukraine in February 2022 triggered an increased demand for risk management and margin financing in particular, which the bank was well-positioned to meet, says Thomas Blair, global head of commodity sales & co-head of global markets investable indices sales. “New clients approached us and others that had been clients during the post-2008 market volatility returned,” he says.

The bank’s growing focus on the energy transition is at the heart of its commodities offering. In 2023, for example, it added the battery metals cobalt and lithium to its product suite and expanded its presence in Asia, Europe, the Middle East and Africa (Emea) to meet client demand, sourcing liquidity and warehousing risk in these markets.

“These trades have enabled auto original equipment manufacturers (OEMs) in Europe to hedge their battery metal exposure as they build out their electric vehicle (EV) production platforms,” says Brett Orlando, head of energy transition within the commodities team at BofA.

This type of commodity hedging has been key to managing significant metals price volatility in recent years, Orlando explains. “That’s a new risk OEMs have needed to manage. These conversations would not have happened five years ago,” he says. “And the growth of Bank of America’s commodity platform in terms of geography and product has allowed us to fully participate in those conversations.”

In addition to developing more low-carbon solutions for its clients, the expansion of BofA’s international presence has led to a more balanced geographical footprint. “Our [commodities] business used to be geographically skewed, with the US accounting for more than 75%. Now it’s roughly 50–55% Americas, 35% Emea, and 10–15% in Asia – and that’s very close to our target,” says Blair. “But we didn’t achieve that diversity by shrinking our largest market. All regions have grown, which gives us a lot more stability in all cycles.”

BofA stayed in the commodities market even during the last down-cycle, when trading and investment opportunities waned and many banks pulled back from the sector.

“We remained committed to commodities because it was important to our clients,” Blair continues.

The bank was also able to prepare for the likely future impact of the energy transition during this period. “Even pre-Covid we saw the markets were changing due a retooling around how people consume energy, and that the energy transition would affect not just oil and gas but power, metals and even investment products.”

While no-one predicted the full impact of Covid, Blair says the energy transition-related investments the bank had started planning before the pandemic helped it to support its clients during the ensuing market volatility.

Institutional clients such as hedge funds and asset managers also approached the commodities business for risk management services, often coming via colleagues in other parts of the bank. “This is one benefit of being one of the largest global banks with a massive reach from a client perspective,” Blair says. “We are part of a broader offering of capital markets and fund offerings, advisory and transaction services, and risk management.”

Cultraro adds that having a diversified client base in terms of the products they trade can help when prices spike in a specific market or when an entity wants to place a larger than usual hedge in a specific market. “We aim to have the right amount of people in the right locations trading the right products,” he says. “In commodity markets, some sort of event can happen every year, or maybe even two or three times a year. Our aim is to make sure we are ready for that so we can support our clients.”