Wednesday, May 21, 2008

Goldman, Morgan top energy derivative dealers

(Globe & Mail Streetwise) The rich are getting richer when it comes to rapidly expanding world of commodity derivatives.

Soaring energy prices have made derivative-based hedging a priority at corporations, and a study last week from consulting firm Greenwich Associates showed powerhouse investment banks Goldman Sachs and Morgan Stanley are emerging as market leaders in this business.

Goldman and Morgan Stanley each enjoy 40-per-cent plus market share with corporations that use over-the-counter (OTC) derivatives, according to a Greenwich survey of 353 international companies. Barclays Capital and JP Morgan were the other major players in the space, with 25 and 25 per cent of the market respectively. No Canadian financial institution cracked the list.

“OTC commodity derivatives trading is a highly concentrated business,” said Greenwich consultant Woody Canaday. “On average, companies use only for dealers for this business and they award up to 90 per cent of their trading volume to their top three dealers.”

Greenwich found BP, Exxon Mobil, Lufthansa, Royal Dutch Shell and Southwest Airlines were the most sophisticated corporate users of hedging strategies, no surprise given the importance of volatile energy prices to the bottom line of each company.

“Companies are increasingly placing a strategic focus on hedging and are looking for proven expertise,” said Greenwich's Andrew Awad. “As a result, many are choosing to work with the derivatives dealers that have the most credibility and the largest franchises.”

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