[DEBATE] : The next crisis here - Private commodity traders losing trust in counterparties
Riaz K Tayob
riaz.tayob at gmail.com
Tue Oct 14 09:16:59 BST 2008
Private commodity traders losing trust in counterparties
Submitted by cpowell on 05:09PM ET Monday, October 13, 2008. Section:
Rush to Put Private Commodities Contracts on Exchanges
By Javier Blas and Jeremy Grant
Financial Times, London
Sunday, October 12, 2008
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 worldâ€™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 houseâ€‰
.â€‰.â€‰. â€‰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
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