Bonus Limits Spark Exodus at Barclays Energy Trading Unit

Bonus Limits Spark Exodus at Barclays Energy Trading Unit
A Barclays Plc bank branch in London. Photographer: Chris Ratcliffe/Bloomberg

Barclays Plc spent a decade assembling a team of the most successful gas and power traders in Europe. It took less than 16 months to lose most of them.

Mercuria Energy Trading SA, based in Geneva, hired five members from the group of about a dozen from March 2011 through June, including Phil Sutterby as head of U.K. and European gas and Roger Jones, Barclays's former global chief of commodities, according to people with knowledge of the moves who asked not to be identified. Six more left for companies including UBS AG, Noble Group Ltd. and Freepoint Commodities LLC.

The departures from the U.K.’s second-biggest bank reflect bonus caps, limits on the amount of money traders can risk and shrinking revenue from the division that includes commodities. While hiring from hedge funds and rival lenders helped Barclays catch up with Goldman Sachs Group Inc. and Morgan Stanley in commodity derivatives, according to Greenwich Associates, a focus on deferred pay left the bank vulnerable to headhunters.

“The significant amount of deferred compensation and the aggressive cap on cash payouts at Barclays has unsettled a number of individuals,” said Peter Henry, New York-based head of front-office research at Commodity Search Partners. “Add to that the fact they have been systematically targeted by privately held trading houses, specifically Mercuria, and it’s fairly understandable why senior traders are leaving.”

Aurelie Leonard, a spokeswoman for the bank in London, and Mercuria Chief Investment Officer Paul Chivers declined to comment on the moves Aug. 17.

Libor Penalty

Barclays has also been shaken by the resignations of its three top executives. Chief Executive Officer Robert Diamond and Chief Operating Officer Jerry Del Missier left last month after the company paid a record fine for manipulating the London interbank offered rate. Chairman Marcus Agius departs Oct. 31.

The company made it harder to retain staff in February, when cash bonuses at the securities unit were capped at 65,000 pounds ($103,000), increasing the portion paid in later years and in stock. In the first half, Barclays cut the amount commodities traders can lose in a day, known as value at risk, or VAR, to 6 million pounds from 14 million a year earlier, according to the company’s latest financial results. That compares with a 13 percent decline in all trading at the bank.

Revenue from fixed income, currency and commodities peaked at 13.65 billion pounds in 2009 before slumping 36 percent in 2010 and another 27 percent in 2011, the company said in its financial results. The measure rose 11 percent in the first half of 2012, “reflecting improved performance in rates and commodities,” the bank said in its latest earnings.

Commodities Derivatives

While investments by Abu Dhabi and Qatar’s sovereign-wealth funds helped Barclays avoid a government rescue during the 2008 financial crisis, it must increase holdings of safe assets to meet new capital adequacy requirements.

The bank built its commodities business by hiring from Brevan Howard Asset Management LLP, a $36.7 billion hedge fund, Morgan Stanley and Enron Corp., the U.S. energy trader that collapsed in 2001, to take advantage of an almost four-fold increase in raw materials prices in the past decade, as measured by the Standard & Poor’s GSCI Spot Index.

Barclays joined the top firms in commodity derivatives last year, matching Goldman Sachs and Morgan Stanley in the share of clients who use them for over-the-counter trading, according to a Greenwich Associates survey of corporate treasury officials that was published in March.

Gas Prices

In energy derivatives, Barclays, Goldman Sachs and JPMorgan Chase & Co. each had 41 percent market penetration and Morgan Stanley had 37 percent, according to the research, carried out between September and November.

The gains preceded the 33 percent slump in revenue from banks’ commodity units in the first quarter, according to data compiled by Coalition Development Ltd., a London-based research company with offices in New York, Singapore and Mumbai. The decline, to $2 billion from $3 billion a year earlier, was due to lower volatility, reduced client trading and weaker natural-gas prices, Coalition said in a June 1 report.

U.S. gas slumped 29 percent in the three months through March and reached a 10-year low of $1.902 per million British thermal units in April this year. The S&P GSCI index dropped 13 percent in the second quarter, the most since 2008.

Traders Leave

Jones, 47, who joined Barclays from Deutsche Bank AG in 2002 and became head of commodities in 2007, left in May for Mercuria. The firm opened in 2004 and is now among the five largest independent traders of crude oil, natural gas, coal, biodiesel and carbon emissions, according to its website. It also owns oil reserves in Argentina, Canada and the U.S., and bio-fuel plants in Germany and the Netherlands.

He followed Sutterby, who had been at Barclays for nine years until March 2011, gas trader Aaron Hudswell and power trader Julian Cowking, who joined Mercuria a year ago, according to the people, who asked that their names not be used because the information is private. Carsten Hansen, the European head of energy sales, departed in April after coming from Enron in 2002.

Ulf Ek, 40, who previously bought and sold at power hedge fund managers Brevan Howard and Amaranth Group Inc. and Enron, left in September and is now an independent trader, according to a person with knowledge of his career. Nordic power trader Thomas Nilsson, 38, joined Freepoint, a Stamford, Connecticut-based trader of commodities, in November after three-and-a-half years at the lender and four years at Nuon Power Generation BV, a unit of Vattenfall AB, the Nordic region’s biggest utility.

Neil Jackson, 36, head of European gas and power trading at the bank and a former Enron employee, started a family investment company in March. Denis Bajolle, 40, joined Hong Kong-based Noble Group as head of non-Nordic power trading in June 2011 after almost 10 years at Barclays.

Cash Bonuses

Marco Saracino became head of coal, dry freight and iron-ore trading at UBS in July last year following almost five years at Barclays. Ola Rosengren, 45, quit as director of commodities option trading on June 30 after 19 months at the lender. He had previously spent about eight years at Bank of America Corp.’s Merrill Lynch unit.

Jones and Hudswell couldn’t be reached. The others declined to discuss their careers.

Barclays left itself open to headhunters by setting lower cash bonuses than competitors such as Deutsche Bank, where the limit was 100,000 euros ($125,000), and Morgan Stanley, which set a $125,000 ceiling, according to data compiled by Bloomberg. For some at Charlotte, North Carolina-based Bank of America, cash bonuses were limited to $150,000.

The U.K. bank also restricted trading more than did some of its rivals. At Goldman Sachs, the fifth-largest U.S. lender by assets, daily VAR in its commodities unit dropped to $20 million in the six months to June 30 from $39 million in the year-earlier period, according to company filings.

Basel, Volker

Commodity trading firms are luring bank employees because they aren’t subject to the same restrictions imposed after the financial crisis.

The Bank for International Settlements’ Basel III rules require lenders to hold more capital in reserve and the so-called Volker rule in the Dodd-Frank Wall Street Reform and Consumer Protection Act prevents holding companies with federally insured deposits from trading for their own accounts. The Commodity Futures Trading Commission is also curbing the positions any one party can take in U.S. raw-material derivatives.

Barclays isn’t alone in losing traders. Raj Sethi, a managing director in Goldman Sachs, quit in March after 14 years. Jean Bourlot, the head of the commodities division at UBS, left in December. JPMorgan closed its group trading raw materials for the bank’s own account last year.

‘New Opportunities’

The U.K. lender also lost staff in research, and stopped its 14-year-old daily analysis of the market on Aug. 17. Amrita Sen, a commodities analyst, left in July to study, two people with knowledge of the matter said at the time. Roxana Mohammadian-Molina, also previously an analyst, joined Tiberius Asset Management AG, the fund manager said last month.

“The platform to do their job and get paid as they did before the banking crisis no longer exists,” Justin Pearson, managing director of Human Capital Search Ltd. in London, said in a July 30 telephone interview. Barclays “housed some very capable people who realized this,” he said. “Because of their reputation they were able to secure new opportunities outside of the banking space.”

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