MANAGING RISK IN THE COMMODITY MARKETS

RC: How would you describe general activity in the commodity markets at present? What trends and developments have unfolded over the past 12-18 months?

Dimech-DeBono: Commodity markets have grown materially during the last decade as a consequence of increased demand from emerging countries, especially China and India, technological developments and market liberalisation in many western countries. This allowed for the development of traded markets with investment banks, funds and specialised commodity trading houses becoming active participants. This growth has reversed over recent years with many of the large investment banks and funds reducing their exposures to commodities, especially physical commodities, or at times even fully exiting the markets. The reasoning behind this reduction was a larger cost base due to greater regulatory scrutiny and less attractive returns. However, we may have started to see signs of recovery over the last few months. The regulation of commodities markets is challenging due to its global nature, the interdependencies of financial and physical markets and the fact that different jurisdictions have their own regulatory frameworks. In order to address this, regulatory authorities have started to work together more closely at both an international level, through IOSCO for example, as well as establishing links between financial and physical regulators. The overall aim is to implement the stringent regulatory regimes in the commodity markets as in wider the financial markets, such Dodd-Frank in the US. 

Oct-Dec 2014 Issue

Grant Thornton UK LLP