Barclays ends trading in commodities

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Barclays, one of the world’s largest commodities traders, plans to pull out of much of its metals, agriculture and energy businesses, which is expected to be announced this week.

The upheaval comes as commodities trading suffers a sharp drop in revenues and attracts closer scrutiny from regulators, which has already led to the withdrawal of several major banks in the region.

Managing Director Antony Jenkins is preparing a strategic investor update on May 8 and is expected to cut several thousand jobs by reducing Barclays’ exposure to areas that do not generate returns above their cost of capital. These are likely to be transferred to an internal “bad bank” and either sold or closed.

But the withdrawal of parts of its commodities business is due to be announced on Tuesday. Barclays declined to comment.

Trading in precious metals is likely to expand into the currency trading business of the bank. Heavy job cuts are expected among the 160 employees in its global commodities trading, sales and research operations, many of them in London.

Barclays is one of the top five commodity banks – which together controlled around 70 percent of the commodity trading pot last year. But many are downsizing or divesting these businesses, including Morgan stanley, Deutsche Bank, UBS and Royal Bank of Scotland.

The decline is due to tighter regulations, new capital constraints and lower profitability due to stable prices for oil and other commodities. Coalition, a consultancy firm, estimates that the commodity revenues of the top 10 banks fell last year to $ 4.5 billion, from $ 14.1 billion in 2008.

In the most prominent example to date, Mercuria, a Geneva-based trading house founded ten years ago by two former Goldman Sachs traders, agreed to purchase the physical commodities business of JPMorgan Chase for $ 3.5 billion.

Only Goldman Sachs, one of the first banks to enter commodities markets 30 years ago, appears to be strategically engaged in the sector, deeming this year “too important for clients to exit.”

Regulators, including the U.S. Federal Reserve, are examining whether to restrict banks’ commodity trading operations after they were accused of manipulating markets for electricity, aluminum and other materials for their own benefit.

Barclays closed its electricity trading operations in the United States and Europe in February after being fined a record $ 470 million for allegedly manipulating electricity prices by the Federal Regulatory Commission of the energy of the United States. Barclays refused to pay the fine, transferring the litigation to federal court.

Separately, Barclays combines its equity and bond trading units, a radical departure from the traditional way investment banks organize trading activities.

As a first step, the bank will merge global equities and credit trading responsibilities under the leadership of Joe Corcoran, previously head of equities, according to an internal memorandum sent out last Thursday and viewed by the Financial Times.

The reshuffle foreshadows a diversity of business units by bringing them together and creating shared infrastructure.

“The intention is to generate efficiency gains and synergies between companies,” said a person familiar with the decision. “We have to break down the silos. “

Mr Jenkins has come under pressure to fix the investment bank after angering investors with an increase in staff bonuses despite falling profits. The unit failed to cover its cost of capital last year with an 8.2 percent return on equity.

At a shareholders’ meeting this week, Mr Jenkins faces the prospect of a protest vote against the bank’s bonus increase last year.

Additional reporting by Xan Rice and Neil Hume in London


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