Peggy and I have two things in common. We both worked as physical commodity merchants at Cargill before moving to futures brokerage.
I started as a futures trader at Cargill and found the shift to physical commodity merchandising challenging. I wasn’t a good salesperson and didn’t enjoy convincing people to buy what I was selling. It was not a problem that I had as a futures trader. The liquidity in a futures market is such that there is (almost) always someone willing to buy when you want to sell or sell when you want to buy.
I enjoyed being a futures broker. I built a small group of clients who trusted me to do my best. I never needed to convince my clients to do something. We discussed their hedging and risk strategies together, and I executed them in the market.
After four years working as a vegoil merchant with Cargill in Amsterdam, Peggy made a similar move into futures brokerage, joining Natixis Bank in London.
“I moved to London partly for personal reasons,” she told me. “Still, I saw it as a huge job opportunity to apply my knowledge of the physical commodities sector to a financial markets role. Natixis was setting up an agricultural brokerage desk for futures and options. They had people for coffee, cocoa, and sugar and took me on for grains.
“I enjoyed working as a physical commodity merchant,” she continued. “Cargill has a fantastic culture with a strong entrepreneurial spirit. Cargill taught me to be entrepreneurial. I still benefit from all that today.
“At Cargill, I was a merchant responsible for one of the vegetable oil product lines. My interactions with our clients were commercial and competitive. I had to understand what the market was doing and watch for whatever everybody else was doing. I had to follow inflows from South America and keep on top of refining margins.
“I found the commercial nature of the job fulfilling, and I especially liked the tangibility of it. I could watch the chartered vessels arrive in the port of Amsterdam and then depart with the products we traded aboard. I found it thrilling. So yeah, I really enjoyed that.
“My first line manager was an accomplished salesperson. He taught me how to connect with clients and have different approaches for different clients.”
“Why did you choose commodities as a career?” I asked.
“I did a master’s degree in business administration from Erasmus University in Rotterdam. Unfortunately, their Commodities programme didn’t exist then. I decided to study business administration as it provided a comprehensive knowledge base in the field of business. It allowed me to study and work abroad, which I found very appealing.
“I was keen to work in a fast-paced environment,” she continued. “When I saw Cargill’s advertisement for graduate trainees, I just knew it was for me.”
“What was your role at Natixis?” I asked. “And, more widely, what is the role of a futures broker?
“Unless they have been in the industry,” Peggy replied, “it’s challenging to understand futures markets or what a futures broker does.
“There are two types of brokers: execution brokers and clearing brokers. The former provides access to the markets and executes trades for clients. They also offer market data and find liquidity.
“Clearing brokers process clients’ trades after they have been executed. They hold the client’s assets, guarantee the client’s obligations and contribute resources to the default fund maintained by the clearing house. These default funds serve to absorb losses from defaults and protect the sustainability of the future’s markets. Natixis was an execution and clearing broker.
“Although it was a significant change from physicals to derivatives, it felt like a natural evolution of my previous role. In addition, I was also involved in physical commodity financing, namely the financing of coffee stored in exchange-approved warehouses.
“Banks offer significant credit lines to clients, larger than a standalone brokerage house would. During periods of high price volatility, clients need enough credit lines not to be forced to reduce their positions. It is a natural business for banks to finance their clients, whether in the fields or the futures markets.
“In 2008, one of our clients, a Brazilian sugar producer, built up a sizeable, short position in the market and couldn’t pay his margin calls. The exchange asked the producer to reduce their net position, but they didn’t. The exchange held the company in violation of its position limits and instructed brokers only to accept liquidating orders.
“This episode brought home to me the responsibility of the clearing member. It made me understand how well the system works and how vulnerable you are as a broker. It is a low-margin business where a client bankruptcy can wipe out your profits for years.”
“Did the move to electronic trading change how brokers operate?” I asked.
“It was challenging for brokers when the trading floors closed,” Peggy said. “Clients had direct access to the markets via their office screens and often did their own trading. You could quickly lose contact with them. There were fewer points of contact.
“The more successful brokers understood they needed an edge. Some offered proprietary research. Others specialised in execution, for example, in arbitrage between raw and white sugar or between New York and London cocoa – the tricky stuff. Others competed with lower execution fees, looking to reduce their overheads.”
I asked Peggy what she liked and disliked about being a futures broker.
“I liked dealing with many different clients in various sectors,” she replied. “I had soft-commodity clients worldwide, from Brazil to Vietnam and Singapore to Europe. I had tradehouses, producers, and corporates as clients. It kept things interesting. I enjoyed travelling and networking, not just with the clients but with others in the markets.
“What I didn’t like was that as a futures broker, you deal with a standardised financial product, which can be less attractive than dealing with shiploads of physical commodities.
“Also, as a futures broker, you don’t necessarily get to understand a client’s strategy. It’s what I enjoy most in my current role, where we tailor and bespoke OTC products to individual client’s needs. To do that, we must understand their objective and their strategy. On an OTC desk, you must get to know every customer to understand what they’re after and how to price it.”
Peggy has worked in commodity sales with Lloyds Bank in London for the past five years, covering Energy, Metals and Agricultural products. I asked her how her current position differed from being a futures broker.
“Futures contracts are standardised products,” she told me. “They trade on an exchange and require daily margin calls. There’s no counterparty risk as the clearing house guarantees them. The clearinghouse is the seller to every buyer and the buyer to every seller. If a counterparty defaults, the clearing house assumes the risk of loss.
“OTC contracts are not standardised but are bilateral and customised agreements between counterparties. They’re not traded on the exchange and are often not subject to margin calls. “You can customise the parameters of a swap, such as the quantity, the currency, the length, etc. They are always financially settled, whereas futures can be financially or physically settled depending on the market.
“The beauty with OTCs is that liquidity is not restricted to the volumes on the exchange as some market participants will warehouse the risk and not hedge them fully with futures. It means you can sometimes offer more liquidity to your client.”
Peggy has had two extended career breaks for maternity leave. After her first career break, she took a return-to-work programme with Macquarie Bank to get professionals like her back into the workforce. Still, she was back on maternity leave by the time she finished the programme.
“It’s not how these programmes should work,” she told me. “But hey, life happens.” After another two years off, she applied for her second return role in commodity sales at Lloyds Bank.
“Those two breaks were a big disruption,” she told me. “Still, they have been a positive for my career. They allowed me to do something new and have a different role in the industry. I went from a commodity merchant to a futures broker, from commodity finance to commodity sales.
“Looking back, I’m grateful for my different experiences, but maintaining a career is much easier than restarting one. There is a lack of returners programmes that offer viable re-entry at a suitable level. However, this is changing as the corporate institutions that provide them are beginning to realise these programs give them a competitive advantage in accessing talent.
“At Lloyds, I am one of the organisers of a pilot sponsorship scheme to support women’s career advancement, matching female colleagues with senior leaders to drive diversity, equity, and inclusion. It shows you how sentiment has changed over the years. It would never have happened when I started my career.”
© Commodity Conversations® 2024
This is an extract from my upcoming book, Commodity Professionals – The People Behind the Trade.