UPDATE 2-Big commodity houses may pose new risks -Bank of Canada

Tue Sep 25, 2012 10:24pm BST

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* Says commodity houses could become systemically important

* Lane says strong currency a drag on the economy

By Scott Haggett

CALGARY, Sept 25 (Reuters) - Large commodity trading houses, together with the physical trading operations of big investment banks, are playing an increasingly prominent role in commodity markets and may become systemically important, Bank of Canada Deputy Governor Timothy Lane said on Tuesday.

In a speech to a Calgary business group on the relationship between the financial system and commodity markets, Lane said it was worth asking whether the losses a trading house incurs, or the failure of a house altogether, would have a significant knock-on effect on the financial system as a whole.

Global regulators are imposing stricter rules on the banking industry to avoid a repeat of the 2008 financial crisis. These include a tougher set of standards for banks designated systemically important, or "too big to fail", meaning their collapse would imperil the broader industry.

"Just as the 2008 financial crisis revealed the need to assess the systemic importance of institutions that play a central role in particular financial markets, we should be asking the same questions about institutions that are interconnected with various commodity markets," Lane said in a copy of the speech posted to the central bank's website.

Regulators have so far focused on banks considered systemically important for the global industry, and are now turning their sights to lenders considered key to national industries.

Consumer nations across the globe have for several years expressed growing anxiety about increased speculation and volatility in commodity prices.

But Lane's comments appear to be among the first to suggest that some of the market's most active players, who typically trade much more in the physical market than in more speculative derivatives, may have become so large that they merit the tougher scrutiny being applied to the world's biggest banks.

Major players in the space include Vitol Group, Morgan Stanley and Glencore International Plc. Lane did not name specific players.

"A number of big institutions, the systemically important potentially large commodity trading houses that I talked about are mostly not Canadian. They're mostly operating in other jurisdictions," he said in remarks following his speech.

"They're operating in an environment globally where interest rates are expected to remain very low for a long time. And that environment is one that involves the build up of risk."

Separately, Lane noted the strong Canadian dollar has been a drag on the Canadian economy for the last few years, but said the central bank has no target for the currency's level and focuses instead on inflation targets.

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