10 October 2007
The Committee of European Banking Supervisors (CEBS) today publishes an assessment of the prudential risks arising from the conduct of commodities business and the activities of firms carrying out commodities business.
The report responds to the second part of a Call for Advice issued by the European Commission in August 2006 and concludes CEBS technical advice on the Review of commodities business under Article 48 of Directive 2006/49/EC.
The report is based on information provided by CEBS members and observers on the structure and regulatory coverage of their commodities markets as well as on information directly provided by market participants on their business, their risk structure and mitigants, their perception of the current regulatory framework and their concerns regarding any amendments to this framework.
The report concludes that at the market level the risks arising from commodities business and the risks in other financial markets (e.g. equity, FX, interest-rate) are generally the same and that these risks exist basically across all types of products (underlyings). In nearly all markets the majority of transactions are for varying reasons (e.g. greater flexibility, lesser burden on liquidity due to the absence of frequent margining requirements) carried out OTC. Therefore, despite the use of risk mitigation techniques, significant CCR remains and needs to be appropriately managed. Other relevant risks identified are market risk, operational risk, legal risk and liquidity risk.
Systemic risk crystallizes through contagion which is transmitted via market participants' direct and indirect interdependencies. While the perceived interconnections may give rise to systemic risk concerns, their extent may depend on the size of the respective markets for commodities or exotic derivatives relative to the wider financial market or the related industry. Systemic risk concerns may vary widely across the different markets/underlyings and no generalization can be made.
The report also touches on the specifics of the commodities markets/business and their possible relevance to the prudential treatment of the variety of firms that are active in the commodities sector.