Commodity Traders Aren’t Too Big To Fail, Trafigura Report Says

(Bloomberg) — Commodity traders don’t pose systematic risks to the global financial system and shouldn’t be subjected to bank-style regulation, according to a paper published Monday by the second-largest metals trader Trafigura Beheer BV. The report ‘Not Too Big To Fail,’ funded by Trafigura and written by University of Houston finance professor Craig Pirrong, argues against imposing capital requirements on commodity trading firms. It says commodity traders aren’t highly leveraged compared with banks, have strong capital structures and use syndicated lending to mitigate risk. “Regulations for banks and other systematically risky institutions are ill-suited for commodity trading firms,” Pirrong wrote in the report. Large losses for one trader don’t have implications for the financial condition of other firms, he said, adding that financial stress for one company is “unlikely” to disrupt overall trading activity. Since the global financial crisis commodity traders including Trafigura, Vitol Group Ltd., Mercuria Energy Group and Gunvor Group have campaigned to differentiate their activities from banks, which have also been involved in trading. While traders have provided loans to resource producers and sometimes governments, Pirrong said the shadow banking structures they employ aren’t fragile because the credit is usually syndicated among large groups of banks with … continue reading

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Source: CTRM Center

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