MF Global pins hopes on Asia oil clearing

Brokerage MF Global aims to further boost its market share in Asia as more firms move to clear their over-the-counter (OTC) fuel derivative trades following concerns over counterparty credit risks, a senior official said on Thursday.

MF Global has built on its ability to facilitate clearing to develop its commodities team in Asia, Mikal Boe, its managing director for commodities, told the Reuters Energy Summit.

''We have seen month-on-month growth in volumes. The volume we have on middle distillates is phenomenal. We are fighting for first, second place every month,'' said Boe.

MF has grown its market share since the fourth quarter, when overall swaps traded volumes in Asia fell on fears of default amid the credit crisis, and the firm expanded its commodities team, Boe said.

''Coming in and making the investment (in people) when the market was at the lowest point, was a good strategy,'' Boe said.

Most of the oil trading business in Asia is done through OTC trades in the absence of established exchanges, and bilateral deals had been the preferred mode.

While overall volumes are stabilising to pre-crisis levels, the proportion of swaps trades cleared has surged to 50-70 percent versus 3-5 percent before the crisis, Boe estimates, as players sought the safety of exchanges such as NYMEX's Clearport clearing platform and limited bilateral trades.

This has given MF Global leverage as it is a clearing member of the Singapore Exchange, InterContinental Exchange (ICE) and the New York Mercantile Exchange. Very few brokering firms are clearing members of exchanges and can offer such service, Boe said.

Last year the firm hired a team of middle distillates and fuel oil brokers, at a time when rivals such as GFI and Spectron were folding up their Singapore teams.

''I had a strong belief in the fourth quarter that the market would find its bottom sometime this year. It was a perfect time to be counter-cyclical,'' he said.

Boe has hired 25 brokers since he joined MF Global last October, most notably bringing in a nine-member team dedicated to middle distillates and seven to fuel oil. Six brokers focus on energy futures trading.

Boe's team also includes brokers dealing with agricultural commodities, and freight, iron ore and carbon trading.

CLEARING HERE TO STAY The company, which is looking to grow further in Asia, is betting that clearing is here to stay.

''The word on the street is that we'll move back to bilaterals. This is where I tend to have a different opinion.

As time goes by, traders have started to realise the advantage of clearing,'' Boe said.

''More players have started to join the market and are able to use a clearing service that will allow them to trade anonymously and gives more price transparency. It is trend, not a short-term change. We have seen it in other markets before,'' he added.

Setting up a clearing account and paying margin fees incur costs, but it may be less than what was paid to financial institutions. Clearing offers more trading opportunities as players need not worry about the other party's credit risk, he said.

''Bilaterals will come back to an extent. In the next two, three years, bilaterals and OTC will balance each other. You could have 60 percent clearing versus 40 percent bilaterals, or 50:50,'' he added.