UBS sticks to commodities index business as it slims down

Fri Jan 18, 2013 8:24pm GMT

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* UBS commodities team part of equities division

* Commodity performance overall weak in 2012

* Bank to remain active in precious metals flow trading

By Jeanine Prezioso

NEW YORK, Jan 18 (Reuters) - UBS plans to grow its commodities index business even as the firm winds down its fixed income unit, retaining what bank executives see as an important product for UBS's wealth management clients.

Edmund Carroll, UBS's global head of commodities trading, will be relocating from London to New York, bank executives told Reuters during an interview this week. He will report to Roger Naylor, global head of equity derivatives.

The bank's commodities group, currently based in Stamford, Connecticut, will also move to New York this month. The commodities index business will be placed within the equities division.

"We're still investing in (the commodities) business," Carroll told Reuters via satellite from London in the bank's Stamford office.

"The corporate hedging business in commodities didn't tie into the wealth management business at all but we wanted to keep the investor business in commodities," he said.

UBS shuttered the majority of its commodities "flow" trading business, that traded raw materials and financial derivatives on behalf of clients, but is seeking to erase the perception that the bank's restructuring has taken it completely out of the sector. It will remain active in precious metals flow trading.

The bank announced in October that it will cut its fixed income business and lay off 10,000 employees while doubling down on its global asset management and wealth management businesses, in a move applauded by the stock market.

Investment banks' fixed-income divisions generally include bonds, currencies and commodities, (known as FICC) and while UBS is winding down that business, it will also remain active in currencies and interest rates.

UBS RESHUFFLES

UBS has gone through major reshuffling in its commodities business in the last two years.

Jean Bourlot, who had served as global head of commodities, left at the end of 2011 after just about 18 months at the helm, to start a hedge fund.

Carroll and Hector Freitas took over from Bourlot as co-heads of the commodities business. Freitas is now global head of precious metals sales.

UBS plans to focus on three areas within the index business including a swap business, selling structured products to wealthy clients and selling structured products linked to commodity futures.

Any risk that may be taken in commodity futures that needs to be hedged will be done through brokerage houses and other Wall Street firms, Carroll said.

UBS will be offering commodity indices that track the prices of baskets of agricultural products, fuels, and metals, much as a stock index tracks the prices of a basket of equities.

Commodities have grown in popularity with investors since the middle of the last decade when they were promoted as a means of diversifying portfolios. Commodity indices have been seen as relatively simple tools for passive investors to gain exposure to raw materials prices without having to invest in multiple markets.

The correlations between returns in commodity markets and other financial assets have increased markedly as more money has poured into the sector and index investments have often underperformed individual commodities.

Commodity market performance for 2012 overall was shaky as global markets focused on the European debt and U.S. fiscal crises. Assets under management in commodity index swaps fell to $133 billion in December 2012, the lowest Since June, according to Barclays Capital data.

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