20 September 2013

Risk.net: Commodity trading houses face questions over systemic risk

The rapid growth of commodity trading houses has led critics to question whether these firms have become a source of systemic risk. Trading houses strongly reject such arguments, and suggest they are little more than paper tigers.

The FSB has commissioned a study into the potential systemic risk posed by commodity trading houses, citing their involvement in  ‘shadow banking’ activities, such as lending and securitisation, as a cause for concern. In addition, by the end of 2013, it is also due to publish guidelines for identifying non-bank, non-insurance G-SIFIs.

Whilst ‘pre-payment transactions’, in which commodities houses pay cash upfront for a commodity to be delivered over time, do act as a source of financing, it is generally thought that these deals are designed to provide access to additional commodity flows and do not represent lending for the sake of lending. In addition, whilst some commodities houses, such as Trafigura, have a programme for the securitisation of trade finance receivables, the scale of these activities is currently very limited compared to those of banks. Furthermore, in contrast to bank securitisations, it seems that commodity house securitisations tend not to involve a potentially dangerous maturity mismatch, whereby long-term assets are financed by short-term money.

The article also makes reference to the joint report issued on 9 July 2013 by CEPS and ECMI [link], which concluded that larger commodity trading houses had grown to the point where their sheer size and importance in physical markets meant that they would have to be bailed out if they went bankrupt in order to avoid widespread disruption to commodity markets.  However, the structure of commodities markets, in which producers can go directly to consumers, would suggest that the failure of a commodity trading house would not have such a significant impact on supply security. Furthermore, this view is supported by history, with the bankruptcy of Enron and Andre & Cie in 2001, Amaranth Advisors in 2006 and Petroplus in 2012 suggesting that disruption to markets may be limited.

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