G20 watchdog says concentration in commodity markets poses threat to broader economy

By Huw Jones

LONDON (Reuters) – The pandemic and war in Ukraine have highlighted weaknesses in commodity markets, where a “significant” concentration of firms, banks, exchanges and clearing houses threatens to transmit losses to the broader economy, the G20 financial watchdog said on Monday .

The Financial Stability Board’s (FSB) deep dive into commodities markets came after regulators expressed concerns they could not get a full picture of a sprawling sector that includes on-exchange and over-the-counter derivatives trading, physical equities, patchy data and globally distributed producers includes.

European natural gas and metals prices doubled, while oil and wheat rallied following the Russian invasion of Ukraine, prompting increases in cash or margin calls on related derivatives.

The FSB, which coordinates financial rules for the G20 economies, said governments are being forced to offer liquidity to some cash-strapped market participants.

However, the report found that there were no major market disruptions – with the exception of nickel on the London Metal Exchange (LME) – and had limited impact on the rest of the financial system.

However, the fallout from the rise in nickel prices reflected concerns about large, concentrated positions and a broader lack of transparency on commodities.

The commodities market adapted to stress by shifting to opaque over-the-counter (OTC) or over-the-counter (OTC) contracts where margin requirements are less stringent, making the links between commodities and banks more complex, the report said.

The FSB said a small number of non-financial trading firms played an outsized role in the trade.

“The juxtaposition of this concentration and interconnectedness in the commodities sector — along with large and leveraged commodity traders, less standardized margin practices and opacity in OTC markets — could combine to spread losses,” the report said.

FSB Commodities Chart 1 https://fingfx.thomsonreuters.com/gfx/mkt/lgvdknrmqpo/FSB%20Commodities%20Graphic%201.PNG

The FSB said vulnerabilities in commodities are similar to those in non-bank financial intermediaries when economies went into COVID-19 lockdown and are now being addressed.

“We will work to improve market participants’ liquidity preparedness for margin and collateral calls… and to identify data gaps in regulatory reporting,” said Klaas Knot, head of the FSB and governor of the Dutch central bank.

FSB Commodities Chart 2 https://fingfx.thomsonreuters.com/gfx/mkt/xmpjkrzgmvr/FSB%20Commodities%20Graphic%202.PNG

(Reporting by Huw Jones; Editing by Kirsten Donovan)

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