G20 Watchdog Warns of Threat to Wider Economy from Commodity Market Concentration

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According to the latest news, the G20’s financial watchdog has warned about the threat posed by the concentration of firms, banks, exchanges, and clearing houses in the commodity market. 

Commodity Market News

The watchdog stated that the pandemic and the war in Ukraine had highlighted the weaknesses in the commodity markets, which could lead to a significant transmission of losses to the broader economy.

The Financial Stability Board (FSB) has recommended that authorities improve transparency, reduce concentration, and enhance resilience in the commodity markets. 

The FSB also urged the authorities to monitor and address the risks posed by the growing use of derivatives and other financial instruments in the commodity markets. To highlight, following Russia’s invasion of Ukraine, the price of natural gas and metals doubled in Europe, while the cost of wheat and oil rose dramatically. 

According to the FSB, which coordinates financial regulations for G20 economies, this compelled governments to provide liquidity to some market participants who were tight for cash.

Nonetheless, the research noted little influence on the rest of the financial system and no significant market disruption, except for nickel traded on the London Metal Exchange (LME).

Nevertheless, the ripple effects from the spike in nickel prices reflected worries about prominent, concentrated positions and overall opacity in commodities.

Based on the analysis, the commodities market adapted to stress by moving to opaque over-the-counter (OTC) or off-exchange contracts where margin requirements are less stringent. This increased the complexity of the relationship between commodities and banks.

Following the FSB, a few non-financial trading enterprises dominated the trading industry.

“The juxtaposition of this concentration and interlinkages in the commodities sector – along with large and leveraged commodities traders, less standardised margining practices, and opacity in OTC markets – could all come together to propagate losses,” the report said.

“We will undertake work to enhance market participants’ liquidity preparedness for margin and collateral calls…and to identify data gaps in regulatory reporting,” FSB Chair and Dutch central bank chief Klaas Knot said.

Commodity vulnerabilities are being remedied now and are similar to those in non-bank financial intermediaries amid COVID-19 shutdowns.

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