Commodity trading firms probably don’t pose systemic risks to the global economy as the companies draw increased scrutiny and banks step back from raw materials, Trafigura Beheer BV said in a report.
Trading houses, such as Amsterdam-based Trafigura, are smaller than banks and have less debt, according to the study, written by Craig Pirrong, a finance professor at the University of Houston. The firms use financial derivatives mostly to hedge their physical activities, rather than to speculate on price swings, Pirrong said in the report, which he posted on his website yesterday.
Trading houses are expanding as regulatory pressure and declining revenue prompts banks including Barclays Plc and JPMorgan Chase & Co. to shrink their commodities businesses. Regulators have started to question whether the once-obscure trading firms need more oversight as well, according to the report.
“Crucially, most commodity trading firms do not speculate on movements in the levels of commodity prices,” Pirrong said in the report. “Although it has been suggested that commodity trading firms are potential sources of systemic risk, as are banks, and hence should be regulated in ways similar to banks, they are in fact unlikely to be a source of systemic risk. That is, commodity trading firms are not too big to fail.”
To contact the editors responsible for this story: Millie Munshi at firstname.lastname@example.org Joe Richter