G20 watchdog suggests commodity marketplace concentration poses menace to wider financial system By Reuters

By Huw Jones

LONDON (Reuters) – The pandemic and war in Ukraine highlighted weaknesses in commodity marketplaces the place a ‘significant’ focus of corporations, banks, exchanges and clearing properties threatens to transmit losses to the broader overall economy, the G20’s money watchdog stated on Monday.

The Fiscal Balance Board’s (FSB) deep dive into commodity marketplaces came just after regulators voiced worry that they have been unable to get a entire photo of a sprawling sector comprising on and off exchange derivatives investing, bodily stocks, patchy data and producers unfold across the world.

European and metals selling prices doubled even though oil and wheat obtained sharply just after Russia’s invasion of Ukraine, creating a spike in funds or margin phone calls on associated derivatives.

The FSB, which coordinates money regulations for G20 economies, stated that pressured governments to present liquidity to some funds-strapped sector members.

The report observed, having said that, that there was no important market place disruption – with the exception of London Metal Exchange (LME) nickel – and limited influence on the relaxation of the economic system.

But fallout from the surge in nickel charges echoed considerations over massive, concentrated positions and opacity in commodities extra usually.

The commodities industry adapted to tension by switching to opaque over-the-counter (OTC) or off-exchange contracts in which margin demands are significantly less demanding, producing ties amongst commodities and banking companies more complicated, the report mentioned.

The FSB stated a tiny amount of non-fiscal buying and selling corporations played an outsize part in investing.

“The juxtaposition of this concentration and interlinkages in the commodities sector – together with substantial and leveraged commodities traders, a lot less standardised margining practices and opacity in OTC markets – could all arrive alongside one another to propagate losses,” the report said.

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

The FSB said vulnerabilities in commodities are comparable to these in non-financial institution money intermediaries as economies went into COVID-19 lockdowns, and are now getting resolved.

“We will undertake operate to greatly enhance industry participants’ liquidity preparedness for margin and collateral calls…and to establish information gaps in regulatory reporting,” FSB Chair and Dutch central lender chief Klaas Knot stated.

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