* Trading giants part of FSB shadow banking review
* Regulators mull new transparency, capital requirements
* Rules seen sapping commodity market liquidity
* Trading houses may be deemed "systemically important"
By Emma Farge
GENEVA, May 1 The world's little-regulated and
often secretive commodity trading houses could face new
disclosure rules, and even capital requirements, because of
their money lending activities, after a global regulatory
watchdog's review of "shadow banking".
The Financial Stability Board (FSB) - a task force set up by
the G20 group of major economies to improve global financial
regulation in the wake of the 2008 crisis - has asked national
and regional regulators to determine whether commodity traders
should come under the scope of new rules.
Among the aims of the Basel-based FSB is to limit risk in
the $60 trillion "shadow banking" sector of non-banks, such as
hedge funds and money market funds, that lend money without the
regulatory framework of banks.
The FSB included commodity traders - most of which are
privately-held, Swiss-based companies that traditionally operate
with little regulatory scrutiny - in a study of shadow banking
completed late last year. The FSB will present recommendations
on shadow banking to G20 leaders in September.
"Enhanced monitoring is the crucial first step and thus,
commodity traders may be subject to regulatory reporting (to
authorities) or additional required disclosures to the market on
their activities and risks," said Svein Andresen, Secretary
General of the FSB in an emailed response to Reuters' questions
Commodity traders have traditionally relied on European
banks for financing, but some of those banks have cut back on
lending because of tougher capital requirements under new rules
to make banks safer.
Big commodity trading houses have themselves stepped into
the breach, using their own liquidity to lend money to other
parties in the commodity supply chain, although such loans are
still thought to represent just a small sliver of their overall
If commodity traders are included under new rules for shadow
banking, policymakers could introduce transparency rules or even
So far, Andresen said the involvement of commodity traders
in shadow banking is thought to be limited "as they usually do
not extend credit using borrowed funds and involving maturity
transformation", referring to the potentially risky practice of
borrowing cash over one timeframe and lending it over another.
"Nevertheless, authorities have to be attentive to new
innovations in the markets (such as the securitisation of
commodity trade finance) which may change the general perception
towards commodity traders' involvement in shadow banking," he
added in the emailed response.
The FSB is also considering the role of commodity trading
firms as part of a review that aims to identify financial
institutions which are systemically important and therefore
require special oversight.
The Bank of Canada's Deputy Governor Timothy Lane said last
September that large trading houses were playing an increasingly
prominent role in commodity markets and may become systemically
The top ten commodity trading firms have collective revenues
of around $1.39 trillion, according to U.S. private equity firm
Large trading companies with good credit can get short-term
revolving loans at rates as low as 1.0-1.5 percentage points
above the London Inter-bank Offered Rate (Libor), the benchmark
based on the rate at which banks lend to each other, according
to Philippe Steiner, vice president of Commodity Trade Invest, a
Swiss-based firm that arranges commodity financing.
The big traders can then lend the money on to other firms at
5 percentage points above Libor, earning a net margin of 3.5-4.0
percent, Steiner said.
"There is an opportunity to use excess liquidity to lend to
smaller traders and pocket the difference," he told Reuters.
"Receiving money from third parties and then lending it to
other traders in the company's own name could potentially be
considered as banking activities and be regulated as such."
One of the difficulties regulators are likely to face is in
determining whether trading houses are lending their own money
or credit borrowed from a third party - which could pass risk on
through the financial system. Many trading companies are
privately owned and do not publish their balance sheets.
Several large traders say openly that they are involved in
some aspects of commodity trade finance.
The world's third biggest trader in raw materials, Trafigura
- with $40 billion in credit lines as of January - said its
hedge fund Galena launched a trade finance fund in late 2010.
Mercuria, which reported revenues of $98 billion in 2012,
says on its website: "We can provide access to credit and
investment for long- or short-term transactions in oil, coal or
metals...Commodities prepayment facilities and working capital
are available to our customers."
The companies did not respond to a Reuters request for
comment on their lending activities.
Bruce Tozer, director at advisory firm De Novo Agricultura,
said onerous rules to prevent other financial institutions from
playing the role of banks could be passed on in the form of
higher commodity prices.
"If commodity traders are covered (by shadow banking
regulations), it could have negative implications for liquidity,
because the reason they are doing this (lending) is that some of
the banks can't," he said.
"There is a risk that this prevents liquidity getting to the
market by other means, with the potential for higher prices."