Commodity Trader Failure Seen as Limited Economic Risk in Study

Any failure of a commodity trader wouldn’t pose a substantial systemic risk to the economy and competitors probably would fill the space, according to Craig Pirrong, professor of finance at the University of Houston.

Commodity merchants aren’t as leveraged as banks, their balance sheets are smaller and they have short-term liabilities, said Pirrong, who undertook a study for the Global Financial Markets Association on whether such companies are too big to fail.

“The basic conclusion was that they don’t pose substantial systemic risk,” Pirrong said in a phone interview yesterday. “They are substantially different from banks in a variety of important ways and as a result they should not be a major regulatory concern.”

Commodity merchants are expanding their activities and hiring traders from banks as lenders overhaul raw materials businesses amid a regulatory push to raise capital requirements and curb proprietary trading. While there’s some “head-to-head” competition between traders and banks, the two models are more “complementary,” Pirrong said.

“The existing regulations limit the ability of banks to be competitive with the trading firms,” Pirrong said. “Just because imposed regulation had many bad features on banks, it doesn’t mean you need to impose the same bad things on other commodity firms.”

Vitol Group the world’s largest independent oil trader, reported revenue of $303 billion last year and Trafigura Beheer BV’s sales were $120.4 billion. Glencore Xstrata Plc, the largest listed commodity merchant, had $189.7 billion in marketing revenue last year.

GFMA chose not to publish the study, which was submitted in July, Pirrong said. The report has been provided to regulators and won’t be made more widely available, GFMA spokesman James White said by phone and by e-mail.