Traders say they are not "too big to fail", clearing houses may be

Reuters

By Dmitry Zhdannikov and Silvia Antonioli

LAUSANNE, April 1 (Reuters) - The world's regulators should stop worrying whether trading houses are "too big to fail" and focus instead on ensuring that new rules are not forcing far too many deals through clearing houses, major commodity traders said on Tuesday.

Some policymakers question whether the largest commodities firms, which handle almost a trillion dollars a year in energy, metals and grains deals, could pose a risk to the wider economy.

They draw comparisons with the huge banks that, following the 2008 collapse of Lehman Brothers, had to be rescued by governments as their failure would have caused economic chaos.

But traders pointed to regulations, aimed at increasing the transparency of complex financial deals, that have forced many trades onto exchanges and through clearing houses.

Some fear these could be stoking up future problems.

"I don't see systemic risks in the commodities space, but I do have a lingering concern around whether we are concentrating masses of risks now into the clearing houses," Paul Reed, chief executive of oil major BP's trading arm, told the Financial Times Commodities Summit.

"There are very few clearing houses and all the regulators are pushing more and more activity into cleared trade. If anyone is too big to fail, it is a clearing house," he said.

The head of the world's largest oil trading house, Vitol, agreed: "We (traders) are not too big to fail. This is a ridiculous notion," Ian Taylor told the conference.

Christopher Delbruck, chief executive of E.ON Global Commodities, also said that he believed the issue of clearing houses was often overlooked.

"Suddenly all the traders have come to clearing houses and have incredible exposure...I think clustering risks and spreading risks is not necessarily appropriate," he said.

Reed at BP said some of his biggest worries were about clearing discouraging hedging.

As an example, Reed said, if a major pipeline outage were to cause a spike in the price of gasoline and diesel, anyone who hedged oil products prices and cleared the transaction could face an immediate margin call.

"Sometimes it means you have to come up with hundreds of millions of dollars the same day," Reed said, adding that if the transaction were not cleared, the two counterparties could address the issue later, when prices would probably have retreated.

Some traders said the way forward was to work with regulators to design a new framework for the oversight of trading houses, which would be lighter than for banks.

The chief executive of trading house Mercuria, Marco Dunand, said he was in discussions with Britain's Financial Conduct Authority (FCA) on disclosing more information.

"But you don't want to be regulated like a bank... we don't take deposits from customers," he said.

(Reporting by Dmitry Zhdannikov; Editing by Anthony Barker)

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