The of Bank of England said on July 5 it will perform an in-depth analysis to boost surveillance of “opaque” commodity markets after the war in Ukraine left the central bank without a complete picture of risks and vulnerabilities.
Just as the global financial crisis promoted unregulated so-called shadow banks, commodity price hikes this year have reminded regulators of the need to close up data gaps in the sector as households grapple with soaring energy bills, and surging inflation.
“Heightened uncertainty following the Russian invasion means there is a significant risk of further disruption to commodity markets,” the BoE’s Financial Policy Committee said in its half-annual report on threats to Britain’s financial system.
Top UK banks have up to 140 billion pounds ($168.39 billion) or 50% of their total core capital of gross exposure to commodity traders, suppliers, and producers, and to commodity derivatives. Roughly 110 billion pounds of UK bank exposures are on their lending books.
Banks have sufficient capital to keep providing credit to commodity market participants, it said. The BoE stated:
“If disruption is prolonged and uncertainty increases, banks may become even less willing to extend credit to commodity market participants.”
Regulators have sight of metals and energy markets traded in Britain, however, commodities such as grains are traded elsewhere in France and the United States.
Furthermore, a huge part of commodity market activity is traded privately or over-the-counter, off an exchange. Physical production and inventory, which are mainly unregulated and inadequately reported, also make it difficult to develop a full picture.
Prices of nickel on the London Metal Exchange reached a record high of more than $100,000 a tonne after Russia, a big producer, invaded Ukraine, with trading interrupted for a week in March and the LME’s clearing house forced to almost double its default fund.
The Financial Conduct Authority and the BoE launched an investigation into the LME and its clearing arm.
Separately on Tuesday, the European Union’s securities watchdog ESMA said a stress test of clearing houses in the bloc showed they were resistant to serious shocks, but that ‘gaps’ in safety buffers were detected in commodity derivatives.
OPACITY AND FRAGMENTATION
Britain’s economic outlook has declined greatly in part due to rising commodity prices and the BoE is concentrating on getting a stronger grip on underlying activity which is interconnected to the broader economy and financial system. The BoE stated:
“Due to opacity, fragmentation of reporting, and lack of data in some markets, quantifying the size and scale of these fragilities and interconnections remained challenging, and addressing this globally should be a priority.”
Trade repositories for reporting transactions were established in the fallout of the global financial crisis over ten years ago, but it is still inefficient to draw on data from them to develop a snapshot of who is subject of a particular commodity. BoE Governor Andrew Bailey told a news conference:
“I think it’s important that the market structures keep up and reflect the change in the supply-demand balance in these markets.”
There are gaps in reporting, with the granularity of data restricted in some markets, with some physically-settled off exchange transactions not even reported to repositories.
Advancements to data reporting should be done in a coordinated manner globally to allow increased surveillance of these markets by authorities, Bailey said.
($1 = 0.8314 pounds)