[DEBATE] : The next crisis here - Private commodity traders losing trust in counterparties

[Riaz K Tayob]

Private commodity traders losing trust in counterparties

Submitted by cpowell on 05:09PM ET Monday, October 13, 2008. Section: 
Daily Dispatches

Rush to Put Private Commodities Contracts on Exchanges

By Javier Blas and Jeremy Grant
Financial Times, London
Sunday, October 12, 2008

http://www.ft.com/cms/s/0/aa0c5430-9884-11dd-ace3-000077b07658.html?ncli...

LONDON -- Commodities traders are rushing their private bilateral 
contracts into exchanges and clearing houses as they race to reduce 
their counterparty risk amid a deepening financial crisis.

The transfer of the opaque over-the-counter deals comes as observers 
warn that commodities, where trading has ballooned in the past five 
years, could be the next market hit by counterparty failures.

Martin Abbott, chief executive at the London Metal Exchange, said the 
crisis was bringing new business into the LME as traders tried to reduce 
their risk, with turnover 45 per cent higher in September compared with 
the same month of 2007.

"Business that was already sitting in the OTC market is now been brought 
into the exchange," he told the Financial Times in an interview.

The LME, the world’s largest base metals exchange, has extended its 
forward-dated futures in copper and aluminium to 10 years from five as 
it tries to capture OTC business.

Mr Abbott said: "When you look at [today's] markets, it is utterly 
sensible to assume that being on exchange, with clearing house  
. . .  must be attractive."

The LME's move comes as other exchanges are pushing into the OTC 
clearing business, in part to capitalise on the strong backing that 
regulators have given to the creation of a central clearing counterparty 
model for the credit derivative markets.

The aim is to reduce the systemic risks inherent when credit derivatives 
are negotiated bilaterally between traders by having a clearing house 
guarantee against default.

Regulators' focus is on the $58,000 billion credit default swaps market. 
The commodities OTC market is estimated at $9,000 billion, according to 
the Bank of International Settlements.

Counterparty risk and tumbling prices will be key topics at the LME 
Week, a gathering of the mining and metals industry, which starts today 
in London.