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* 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 on Wednesday.
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 business.
If commodity traders are included under new rules for shadow banking, policymakers could introduce transparency rules or even capital requirements.
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 important.
The top ten commodity trading firms have collective revenues of around $1.39 trillion, according to U.S. private equity firm First Reserve.
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."
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