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Banking Regulation May Hurt Hedging in Commodities, Study Finds

Services in commodities hedging provided by banks will shrink and the terms will be stricter because of new regulations adopted since the global financial crisis, Greenwich Associates said.

Regulations such as Dodd-Frank and Basel III will establish stricter capital reserve requirements and require mandatory central clearing for over-the-counter derivatives that will reduce bank profits, the Stamford, Connecticut-based researcher said in an e-mailed statement today. Companies hedge about 54 percent of their base-metals needs and 46 percent of their precious-metals exposure, according to the study.

Banks’ offerings of products and credit in the commodities derivatives business may have peaked in 2011, Greenwich Associates said. The business was dominated by two banks servicing the energy industry a decade ago and has at least 10 bank and non-bank providers today, it said. Companies in Asia are the most active in hedging and cover about 75 percent of their base-metal exposure, while in Canada they cover 38 percent.

Hedges may also get shorter as banks seek to reduce long-term risk, according to the study. About 54 percent of companies hedge for a year or longer, Greenwich Associates said.

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