Five Minutes with Michael Frawley, global head of metals at Jefferies Bache, managing director and head of sales and base metals at Jefferies & Co.
The London Metal Exchange in August approved Jefferies Bache, the brokerage arm of U.S. investment bank Jefferies Group, as a ring-dealing member, making it one of a dozen “top-tier” members allowed to trade via open-outcry, electronic platform and phone. The move is a push by Jefferies into the commodities space, following the hiring of a number of floor traders from Natixis Commodity Markets and several metals traders from Jefferies’ rival Newedge. JLN Metals editor Sarah Rudolph spoke with Michael Frawley, global head of metals at Jefferies Bache, on what is behind the move and what are the opportunities in the current economic environment.
Q: The Financial Times reported that Jefferies is making a big push into the metals space and hopes to be one of the top ranked metals brokers on the LME. How did this come about and why metals?
A: Jefferies bought Prudential Bache on July 1, 2011, a substantial acquisition to form what is now Jefferies Bache. There are numerous commodity businesses within Jefferies Bache. We believe this is the right time to expand our metals franchise. For example, the LME floor team of Natixis recently became available, and we saw that as a strategic fit and an opportunity for us to further expand our global offering. We can now provide our clients the choice between different pools of liquidity, either electronic, or the floor or with our own market making via voice or IM.
We consider ourselves to be in a sweet spot in the industry where we are confident with our growth strategy and feel we are moving from strength to strength, particularly while other firms are downsizing their businesses.
Q: Will you be based in London now?
A: No, I am based in New York, where Jefferies Bache is headquartered.
Q: Was the takeover of the London Metal Exchange by HKEx a motivation for this move at all? Do you expect it to bring in more trading?
A: It was not a motivation but it does provide a background. The fact that HKEx purchased the LME at a multiple of 180 times earnings underscores the importance of the natural resource market in Asia and the investment HKEx is prepared to make to access that marketplace. China is the largest importer of metals, representing 40 percent or so of base metals world consumption. HKEx plans to bring the Asian dynamic to the LME and indeed, we wish them every success.
Q: HKEx has pledged to keep the London bourse’s ring and system of establishing metals prices until at least 2015. Do you think anything will change after 2015?
A: The HKEx told me personally that they have no interest in setting a target for change. They want to assure the marketplace that they are fully committed to supporting the LME in all aspects of their business for as long as the modes of trading conducted today continue to be supported by the marketplace. I believe the HKEx and by extension the LME will continue to support all strategies as long as they remain relevant. Of course, there’s a natural evolutionary process in all businesses, and time will tell with floor trading as well as current modes of voice or electronic trading. The floor is particularly important for sourcing prompt date liquidity. Throughout its contracts, LME has over 1,000 settlement dates. Consequently, there is considerable activity within the date structure of the LME community, which does not lend itself to all aspects of screen trading. The electronic market tends to focus on 3-month trading and a limited number of spread contracts. The floor in particular establishes the full closing price curve throughout the date structure at 5pm each day and currently I see no replacement or alternative to the floor for this activity.
Q: Was your hire as global head of metals and listed products the first step in the boost of Jefferies’ metals desk?
A: Actually, I believe Patrice Blanc, the CEO of Jefferies Bache, has made a steady investment in our metals offering since Jefferies acquisition of Bache, in 2011. I joined Jefferies in June of 2012, and you must see that as part of a strategy to build out all aspects of the Jefferies Bache commodities platform.
Q: Is the demand for metals trading a result of the eurozone banking crisis? How are you – as the Financial Times article said – “capitalising on the eurozone banking crisis to expand beyond [your] traditional reach”?
A: I think that’s where we are today. There are many opportunities presented to the North American and Asian FCM community as the European banking and brokerage community continue to downsize prompted by their more challenging economic environment.
We have been able to hire a number of the best people in our business. I am pleased at what we see happening around us, in terms of our ability to attract top tier clients and brokers.
There are growing opportunities for market participants, including investors and hedgers. Investors and fund managers continue to see base metals as an asset class, while hedgers are increasingly seeking to minimize their exposures to market risk and price volatility.
I also see a trend in which the Asian community will look to extend their reach globally. As the Chinese regulators lower the regulatory hurdles and as the renminbi becomes convertible, there will be tremendous growth within the Asian marketplace and banking community. The recent effort by the HKEx to anticipate this change and list a Renminbi FX future contract is an indication of the changes ahead.