OTC trading platform of the year: China Merchants Bank

China Merchants Bank (CMB) wins this year in the category Over-the-counter (OTC) trading platform of the year came down to a combination of winning factors. Ample client recognition, advanced front- to back-end operations systems, well-thought-out internal policies for risk management and governance, coupled with a fast, efficient trading service – all of which came under pressure during the Covid‑19 pandemic but ultimately held up – made for a smooth, seamless experience for the bank’s clients. Indeed, CMB capitalised on the situation by driving its business forward by catering to the commodity hedging needs of many small and medium-sized enterprises (SMEs) that were left in the lurch by other mainland and international banks during the past 12 months.

“Client recognition helped us,” says Henry Hou, CMB’s head of commodities in Hong Kong. “Right from the start, we had a good business model with advanced systems to run our front-to-back office functions. We also implemented good internal policies … Having the right business model, advanced systems, good risk management policies, a professional team, and a great reputation as a commercial bank means CMB can do well,” he says.

By offering its customers a smooth, efficient trading experience, clients appreciate the bank’s service because fast execution is key, Hou says. He adds: “Our system goes further than just being able to trade quickly and efficiently. Every trade recap and confirmation documents are automatically produced; it helps eliminate most of the human errors and improving productivity and efficiency.”

CMB started its commodities business from scratch just five years ago. Oddly, that too has been a factor in the bank’s success in the commodities realm – not having any legacy technology issues, the bank could adopt the current technologies.

“We could start off by using the latest system while constantly updating to our needs,” says Albert Liu, a CMB executive director and head of structured products.

Today, the bank has a well-seasoned team of specialists, with several members of its team having 15 or more years of experience in the field.

“Having the right business model, advanced systems, good risk management policies, a professional team and great reputation as a commercial bank means CMB can do well in the market,” Hou says.

Despite huge volatility and historically anomalous negative oil prices last year, CMB’s commodities team more than doubled its client base and saw profits grow 150% in 2020–21. It is also the fourth largest bank in the world, with a market capitalisation of $200 billion, and offers comprehensive banking services to both retail and institutional clients. 

The past 18 months have undoubtedly been one of the most volatile periods for all commodities. Simply looking at oil, the international benchmark ICE Brent and WTI lost more than 70% in value in the second quarter of 2020 – later gaining over 100% in early 2021, when the world economy evidenced signs of recovery. Huge volatility in oil prices presented a large challenge to many companies’ finance departments and the bank has seen increased hedging activity not only in traditional simple crude oil but also in different oil products across the barrel.

Reflecting on the pandemic, Liu says, overall, the bank handled itself “outstandingly compared to its competitors. After March last year, markets were very volatile. Oil prices were negative and gold prices were up. During that period, a lot of clients were restricted from trading with their providers. We did not stop any of our clients from trading, while some of our competitors shut off some clients. That led to many new clients coming to us over the past 12–18 months,” he says.

In fact, during that period, CMB’s client base increased somewhere between 300% and 400%.

Similarly, according to Ryan Wang, a senior commodities trader with CMB, the institution’s renown in the financial world and more specifically – its successful corporate banking arm – gives CMB a huge advantage in client penetration, especially for SMEs when compared with other foreign banks. “The commodity trading capability is a true value-add to our current Ficc platform. For the past 12 months, we have seen many SMEs coming to us with their commodity hedging needs,” he says.

Based on our client feedback, it appears CMB is among the few banks providing 24/7 around-the-clock trading services with instant feedback. It has offices in mainland China and Hong Kong to cover both mainland, Hong Kong and Singapore public holidays.

“As long as [the] main European and US exchanges open, our clients can reach us to execute their hedging needs through both OTC voice and e-trading platform,” Wang says. “Most of the time, our client can get price quotes within seconds, providing a huge timing advantage when markets are extremely volatile, like last year.” 

CMB’s global commodity business is overseen and led by its global markets department from head office in Shanghai, with sales and trading teams operating around the clock in Hong Kong, London and New York.

Traditionally, the bank has had a strong precious metals business. In 2016, CMB added other energy, base, agricultural and bulk underlying to its commodities offerings. Within a few years, its client base expanded from retailers to base metal smelters, oil majors, regional refiners, petrochemical manufacturers, and international commodity traders. Its client base has increased fivefold and trading volume has increased by a factor of 10 since 2016.

With Covid-19 spreading across the globe since last February, the whole industry has been affected, with many employees still working from home.

To prevent the risk of concentrated transmission of infection in the central financial area, CMB practised business continuation plan exercises numerous times in advance, Wang says.

“Every team works in two shifts to ensure each shift’s members can independently cover all the workload if anyone caught by the virus. Working remotely was also constantly tested and available to all employees, this allowed us to continuously answer client requests without any interruption or delay during [the] pandemic period,” he says.

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