"People are talking about [setting aside] more capital" for non cleared over-the-counter derivatives, he said.
"This might render these transactions being more expensive. Ultimately, we have to see how it shapes up, and we have to see whether it is a fair playing field for the different actors in the market."
Godin's words underscore the concerns in the Asian commodity derivative trading community on how recent US and EU reforms, like the Dodd-Frank Act, impact players in the region. The Dodd-Frank Act, signed into US law on July 21 this year, provides a new regime for over-the-counter derivatives, including new rules for mandatory reporting, clearing and margin requirements.
"In China, we have a team that provide hedging services for local corporates. The derivatives we provide to Chinese corporates are done out of our Chinese banking subsidiary and not out of Hong Kong or Singapore."
"Regulators appreciate that because they know what we can offer to clients in that country. In the region, there's a lot of moves by local regulators to ensure that overseas marketing, sales and execution is under control."
Further commenting on the increasingly regulated oil market, Godin said that "we can foresee that major traders, or players who have dominant positions in the market, will be obliged to transact on platforms like ICE for execution and clearing."
"Generally the community likes to have one center for liquidity per product. What we see is major users of the market are, little by little, getting more familiar with transacting and clearing these transactions through mechanisms like [NYMEX] Clearport."
"[There is no issue] if the contracts we're dealing with are very standardized. But, when you go further away from these contracts, then typically the market's not liquid at all to do that."
AGGRESSIVE ACTORS IN MARKET PRESENT CHALLENGE TO BANK
Meanwhile, a lot of actors have been coming into the Asian commodities markets. As a result, "market spreads have narrowed quite a lot compared with the year before. Everybody has been more aggressive in showing markets, including oil," Godin said when asked about the key challenges facing the French bank for the year ahead.
Another key challenge for Societe Generale is the allocation of capital for its corporate clients. "The environment is recovering nicely in Asia, faster than a lot of other regions in terms of credit, country risk, so when you look at that, we're really trying to deploy our capital in the region for our corporates. But we have to make sure we do it properly."
The diverse range of commodity players in Asia is also a consideration for the bank. "In commodities, you have the banks, but there are plenty of other major traders which are providing similar hedging solutions to end-users."
"Everybody has their own advantages and drawbacks compared with each other for the clients, but it is not like it is simply the banking community providing that services. It will be interesting to see how it shapes up."
There was also an increasing interest in the dealing of commodity derivatives being embedded into physical contracts on a global basis.
It remains to be seen whether such physical contracts will attract the attention of regulators as futures and OTC contracts have, said Godin.
"If you look at some countries in Asia, for example, you will find some clients who are keen to do embedded hedges into physical contracts instead of trading futures or OTC derivatives because it seems easier for them at the time."
INVESTORS BECOME MORE TACTICAL, STRUCTURED PRODUCT SALES WEAK
When asked about recent investment strategies in terms of commodity derivatives, Godin said: "We see a lot of the more tactical investor trying to pick up dips," and then unwinding them "when they reach their target, more so than holding a long-term allocation as part of their books."
"A lot of people have been trying to invest in alpha strategies on indices." A lot of banks, meanwhile, have been offering different types of products based on such strategies, "which don't really expose you to the commodities market, but rather the relative value between sub-asset classes.
"Also, a lot of people have been concerned about volatility. A lot of products we have been offering would have a volatility target, meaning that the investment is capped in terms of the volatility of the product, depending on what the investor wants," he added.
Meanwhile, structured products and structured funds have been much less popular the past two years post-Lehman, and the retail market was taking time to recover in this respect, Godin continued. "In the structured products market, although we see some good signs it remains weaker than before the crisis, so it affects every asset class, which includes commodities."
VOLATILITY IN OIL DERIVATIVES EXPECTED TO INCREASE
"I do anticipate that volatility [in oil derivatives] will not go much lower. In fact, its expected to go up, but we are not in crisis-mode any more in these markets, especially in Asia, said Godin, adding that the bank was currently pegging 20% as the level of volatility for oil derivatives, and was between 40-50% during the post-Lehman crisis.
Finally, he noted that what was "very interesting" in Asia was "the capacity to evolve very quickly."
"The way markets are changing [in Asia] is taking much less time than the change we've seen in Europe 10 years ago. Personally I do believe Asia will continue to expand."
"The structure of some markets is also changing to a floating price basis for their physical transactions," he continued, and stakeholders involved would need to manage that price risk through derivatives.
