Here's the deal

To find out about ICAP and the nuts and bolts of broking metals, The Gateway spoke to Head of Base Metals, Robert Rees

What does ICAP do?

ICAP brings together buyers and sellers in the wholesale financial markets in a number of asset classes, including interest rate, foreign exchange, equities and equity derivatives, commodities and credit. ICAP operates a global network in some 70 different locations.

*Do you and your colleagues use voice broking or electronic broking? *

At ICAP we have businesses that are purely voice brokered and others which operate entirely on an electronic platform. The metals business is a hybrid of the two, combining voice broking with electronic trading. Whether voice or electronic trading is used is usually dictated by the complexity of the product with which you're dealing. Generally speaking the more homogenous the product, the better suited it is to electronic trading: futures trading is nearly all electronic as futures are standardised contracts that don't tend to vary. Electronic trading provides clients with transparency, high speed execution and in most cases, greater operational efficiency. That said, voice broking makes up a large part of our metals business. The service our brokers offer to clients over the phone is highly valued and lends itself to more complex metals products such as options, where there are many different variables in the product.

*Could you outline your professional background, and how it led you to your current role as a metals specialist? *

I've worked at several banks over the course of my career, principally in the base metals. I spent some months on the floor of the London Metal Exchange (LME) during my first internship as a student, which I thoroughly enjoyed, so staying in metals when I left university was a natural progression. The LME floor has been in existence for over a hundred years and has many quirky traditions! It has one of the last remaining open outcry floors in the City and is full of interesting characters.

*We understand that ICAP's team in this area was set up by you two years ago - could you explain the market rationale for doing so? *

Metal derivatives are used by many of ICAP's clients and as such, launching a business in this space made commercial sense. Since the financial crisis, metals have gained greater significance with prices rallying strongly over the course of the last two years. Copper for example, has nearly trebled in price since early 2008 and these sorts of gains present ICAP's clients with both challenges and opportunities. ICAP's timing in building a business in this space was good - our clients needed a global broker to help them ascertain prices. ICAP's metals business is transaction based, so like many of ICAP's businesses we bring clients together, execute trades on their behalf and earn a commission for this service. ICAP is a member of the LME which entitles it to trade "LME" contracts for its clients and other member firms.

Who are the main buyers and sellers of metals and metals derivatives?

There are two main users of the metals market, industrial organisations and investment funds. Investment funds seek a return on the money they manage and buy and sell metals derivatives in an attempt to use moves in metals prices to do so. The industrial market has three broad categories: producers, consumers and intermediaries. Producers, natural sellers, are organisations involved in various stages of the production of metal. Consumers, natural buyers, purchase metal to use in a broad array of products from aeroplanes and copper pipes to car batteries. Intermediaries ship, store and trade physical metal. All of these organisations are affected by changes in the price of metal. Our clients offer them all derivative structures that help them hedge price risk or generate returns. Clients use ICAP's metals business to lay off this risk using LME metals derivatives contracts.

*We understand that your team has members in New York and Hong Kong. Could you talk about the workings of the international aspects of your team's business? *

The LME's electronic trading platform opens at 1.00am London time, and we have broker coverage from Asia to service clients in this timezone. I'm not sure we could expect people in London to come to work at that time in the morning! We offer a 24-hour broking service through our international team. That's not the only reason for our international presence however. The significance of emerging economies outside Europe is ever-increasing, especially China, India and Brazil, which will arguably be engines for world economic growth and so it seems inevitable that their production and consumption of raw materials will increase.

Could you explain how other ICAP departments support your work?

We work with everyone from risk management to our operational groups and research team. We send market information to our clients every day, which requires a fair amount of input from other parts of the organisation. We also use the knowledge of other business units, for example, our freight, energy, precious metals and FX businesses. Clearly base metals don't operate in isolation. Dollar/euro exchange rates, gold and silver and "commodity" currencies such as the Australian or Canadian dollars, or interest rates all play their part - analysis of these areas helps us to assess where our market could be going.

Can you tell us about any new developments in the metals world?

We are keeping a keen eye on the potential launch of exchange traded funds (ETFs) in the metals space, for example, copper and aluminium ETFs. They will offer greater access to some investment organisations that can only invest in listed instruments. They are premised on underpinning a security with physical ownership of commodities, and so a certain proportion of the global inventory of metals might be used in the future to underwrite ETFs. Working out the price implications is interesting to think about.

LME steel derivatives are a relatively new product on the LME - ICAP is a leading steel broker. For many years steel was just traded physically between a buyer and a seller. Offering a steel hedging product to a consumer or producer offers them the same hedging benefits as other metals derivatives and so should take off in the same way as other more established products. Steel is a big part of the global construction industry, and so we would be keen to see steel derivatives flourish.

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