Volatile commodity prices in the wake of Russia’s invasion of Ukraine are forcing major trading houses to scramble for cash and fueling nervousness about potential threats to the financial system.
So far, however, there is little evidence that the firms or clearinghouses pose a systemic threat, observers said.
“It’s important to distinguish between ‘can fail’ and ‘too big to fail,'” Craig Pirrong, a finance professor at the University of Houston, wrote on March 16 on his Streetwise Professor blog.
“There is no doubt that commodity trading firms can and have failed in the past. That doesn’t mean they’re too big to fail, in the sense that failure of one would or could trigger a broader disruption of financial markets and the banking system, much like the deepening of the financial crisis that followed the collapse of the Investment bank Lehman Brothers in September 2008, he said.
CL.1 oil prices, -2.95% BRN00, -0.62%,
Wheat W00, -1.79%,
Metals and other commodities have surged since the Russian invasion of Ukraine on February 24th, but have also experienced significant volatility. While this appears to be positive for commodity trading companies, it has contributed to a liquidity crisis. Exchanges and banks’ brokerage departments have demanded increased deposits, or margin, that traders in futures markets have to make, the Wall Street Journal found.
This, in turn, has in some cases forced players to reduce positions, according to news reports, reducing liquidity and increasing price volatility. Physical traders have started to increase credit lines to finance freight.
Trafigura, one of the world’s largest commodities trading firms, announced on Wednesday that it had more than doubled the size of a bank loan facility that would allow it to borrow up to $2.3 billion.
“This additional liquidity cushion enhances Trafigura’s ability to navigate the current unprecedented market conditions and demonstrates once again the strong support of the banking community,” said Christophe Salman, Trafigura’s Group Chief Financial Officer, in a press release.
Earlier this month, a trade group representing Europe’s largest energy traders asked governments and central banks for emergency aid. In a letter, the European Federation of Energy Traders, whose members include BP, Shell and commodities traders Vitol and Trafigura, said that “time-limited emergency liquidity support is needed to ensure wholesale gas and electricity markets continue to function”. News reports said. EFET members have raised the issue with central banks, the Financial Times reported, citing people familiar with the matter
But the volatility observed in commodity markets so far doesn’t appear to weigh unduly on U.S. exchanges or clearing houses, which have stress-tested negative scenarios along with regulators, said Timothy Massad, who served as chairman of the U.S. Commodity Futures Trading Commission from 2014 to 2017 and was previously served as Assistant Secretary for Financial Stability at the Treasury Department and oversaw the Troubled Asset Relief Program.
“At least so far I would say [U.S.] Clearing houses have been able to handle this adequately,” Massad said, noting however that the London Metal Exchange ran into trouble amid a brief slack, which led to the shutdown of nickel trading and continued volatility in trading in the commodity.
Read: The turbulence in the nickel market: what investors need to know
Pirrong wrote that even the largest commodities trading firms are not that large compared to large financial institutions, noting, for example, that Trafigura’s total assets are currently about $90 billion, versus about $640 billion for Lehman in 2008, while the markets are now also much larger than they were 14 years ago.
“When you compare assets, even the biggest commodity traders rank around banks you’ve never heard of,” he said.
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